Consider the following cash flows on two mutually exclusive projects for the Bahamas Recreation Corporation (BRC). Both

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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.

Year ..........................Deepwater Fishing ..............New Submarine Ride

0 ...........................................−$850,000......................... −$1,650,000

1 ..............................................320,000 ...............................810,000

2 ..............................................470,000 ...............................750,000

3 ..............................................410,000 ...............................690,000

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?

Corporation
A Corporation is a legal form of business that is separate from its owner. In other words, a corporation is a business or organization formed by a group of people, and its right and liabilities separate from those of the individuals involved. It may...
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Corporate Finance

ISBN: 978-0077861759

11th edition

Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe, Bradford Jordan

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