Consider the following cash flows from two mutually exclusive projects for the Bahamas Recreation Company. Both projects
Question:
Consider the following cash flows from two mutually exclusive projects for the Bahamas Recreation Company. Both projects require a 16 percent annual return.
Year | Deep Water Fishing | New Submarine Cruise | ||||
0 | −$ | 990.000 | −$ | 1.930.000 | ||
1 | 410.000 | 980.000 | ||||
2 | 542.000 | 840.000 | ||||
3 | 460.000 | 830.000 | ||||
a-1. Calculate the IRR for both projects. (Do not round up intermediate calculations. Enter your answers in percentages rounded to 2 decimal places, for example 32.16.)
IRR | |
Deep Water Fishing | % |
submarine journey | % |
a-2. Which project should you choose according to the IRR?
submarine journey
Deep Water Fishing
b-1. Calculate incremental IRR for cash flows. (Do not round up intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places, for example 32.16.)
Incremental IRR %
b-2. Which project should you choose based on incremental IRR?
submarine journey
Deep Water Fishing
c-1. Calculate NPV for both projects. (Do not round up intermediate calculations and round your answers to 2 decimal places, eg 32.16.)
NBD | |
Deep Water Fishing | $ |
submarine journey | $ |
c-2. Which project should you choose according to NBD?
submarine journey
Deep Water Fishing
c-3. Is the NPV rule consistent with the incremental IRR rule?
NO
Yes
Corporate Finance Core Principles and Applications
ISBN: 978-1259289903
5th edition
Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe, Bradford Jordan