NPV versus IRR Consider the
following cash flows on two mutually exclusive projects for the
Bahamas Recreation Corporation....
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Finance
NPV versus IRR Consider thefollowing cash flows on two mutually exclusive projects for theBahamas Recreation Corporation. Both projects require an annualreturn of 15 percent.
YEAR
DEEPWATERFISHING
NEWSUBMARINE RIDE
0
−$835,000
−$1,650,000
1
450,000
1,050,000
2
410,000
675,000
3
335,000
520,000
As a financial analyst for thecompany, you are asked the following questions.
If your decision rule is to accept the project with the greaterIRR, which project should you choose?
Since you are fully aware of the IRR rule’s scale problem, youcalculate the incremental IRR for the cash flows. Based on yourcomputation, which project should you choose?
To be prudent, you compute the NPV for both projects. Whichproject should you choose? Is it consistent with the incrementalIRR rule?
Answer & Explanation
Solved by verified expert
3.7 Ratings (536 Votes)
a Let us first calculate the IRR for the two projects Deep water fishing CF0 835000 CF1 450000 CF2 410000 CF3 335000 So the IRR of this project is IRR 2149 B The incremental IRR can be
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