1. Answer in Excel. 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.
Year____Deep water Fishing____New Submarine Ride
2_______ _510,000______________ 800,000
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 find out 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 your choose? Is it consistent with the incremental IRR rule?
2. Capital budgeting with Inflation: Consider the following cash flows on two mutually exclusive projects:
Year_______Project A________Project B
The cash flows of project A are expressed in real terms, whereas those of project B are expressed in nominal terms. The appropriate nominal discount rate is 13 percent and the inflation rate is 4 percent.
a. Which project should you choose?
3. Calculating Break-even: In each of the following cases, find the unknown variable. Ignore taxes.
Bread-even___Unit Price____Cost___________Fixed Costs____Depreciation