NPV versus IRR Consider the following cash flows on two mutually exclusive projects for the Bahamas Recreation Corporation (BRC). Both projects require an annual return of 14 percent. Deepwater Fishing -$725,000 270,000 420,000 380,000 Year 0 1 2 3 New Submarine Ride -$1,450,000 820,000 650,000 540,000 As a 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?
NPV versus IRR Consider the following cash flows on two mutually exclusive projects for the Bahamas Recreation Corporation (BRC). Both projects require an annual return of 14 percent. Deepwater Fishing -$725,000 270,000 420,000 380,000 Year 0 1 2 3 New Submarine Ride -$1,450,000 820,000 650,000 540,000 As a 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?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:NPV versus IRR Consider the following cash flows on two mutually exclusive projects for the Bahamas
Recreation Corporation (BRC). Both projects require an annual return of 14 percent.
Deepwater Fishing
-$725,000
270,000
420,000
380,000
Year
0
1
2
3
New Submarine Ride
-$1,450,000
820,000
650,000
540,000
As a 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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