a. If your decision rule is to accept the project with the greater IRR, which project should you choose? b. Because you are fully aware of the IRR rule's scale problem, you calculate the incremental IRR for the cash flows. Based on your computation, which project should you choose? C. To be prudent, you compute the NPV for both projects. Which project should you choose? Is it consistent with the incremental IRR rule?
a. If your decision rule is to accept the project with the greater IRR, which project should you choose? b. Because you are fully aware of the IRR rule's scale problem, you calculate the incremental IRR for the cash flows. Based on your computation, which project should you choose? C. To be prudent, you compute the NPV for both projects. Which project should you choose? Is it consistent with the incremental IRR rule?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:NOV
NPV versus IRR
18
11. NPV versus IRR - consider the following cash flows on two mutually exclusive projects for the Bahamas
Recreation Corporation (BRC). Both projects requires an annual return of 14 percent.
New Submarine
year
Deepwater Fishing
Ride
-$750000
-$2100000
310000
1200000
430000
760000
3.
330000
850000
As financial analyst for BRC, you are asked the following questions:
a. If your decision rule is to accept the project with the greater IRR, which project should you choose?
b. Because you are fully aware of the IRR rule's scale problem, you calculate the incremental IRR for the cash flows.
Based on your computation, which project should you choose?
C. To be prudent, you compute the NPV for both projects. Which project should you choose? Is it consistent with the
incremental IRR rule?
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