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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 -$750,000 -$2,100,000

1 310,000 1,200,000

2 430,000 760,000

3 330,000 850,000

As a financial analyst for BRC, you are asked the following problems:

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 you choose? Is it consistent with the incremental IRR rule?

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Basic Finance, Finance

Category:- Basic Finance
Reference No.:- M950347

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