Question

Consider the following cash flows on two mutually exclusive projects for the Bahamas Recreation Corporation. Both projects require an annual return of 15 percent.

As a financial analyst for thecompany, 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? Explain why

b. Since 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? Explain

Year | DW Fishing | Sub Ride |

0 | (835,000) | (1,650,000) |

1 | 450,000 | 1,050,000 |

2 | 410,000 | 675,000 |

3 | 335,000 | 520,000 |

Answer #1

NPV versus IRR Consider the
following cash flows on two mutually exclusive projects for the
Bahamas Recreation Corporation. Both projects require an annual
return of 15 percent.
YEAR
DEEPWATER FISHING
NEW SUBMARINE RIDE
0
−$835,000
−$1,650,000
1
450,000
1,050,000
2
410,000
675,000
3
335,000
520,000
As a financial analyst for the company, you are asked the
following questions.
If your decision rule is to accept the project with the greater
IRR, which project should you choose?
Since you are fully...

NPV verses IRR Consider the following cash flows on the two
mutually exclusive projects for the Bahamas Recreation Corporations
(BRC). Both projects require an annual return on 14%
Year Deep Water 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
a) If your decision rile is to accept the project with the
greater IRR, which project should you choose?
c) To be prudent, you compute the NPV for both projects. Which
project should you...

Consider the following cash flows on two mutually exclusive
projects for the Bahamas Recreation Corporation (BRC). Both
projects require an annual return of 18 percent. Year Deepwater
Fishing New Submarine Ride 0 ?$ 1,040,000 ?$ 2,030,000 1 460,000
1,080,000 2 582,000 890,000 3 510,000 930,000 a-1. Compute the IRR
for both projects. (Do not round intermediate calculations. Enter
your answers as a percent rounded to 2 decimal places (e.g.,
32.16).) IRR Deepwater Fishing % Submarine Ride % a-2. Based on...

Consider the following cash flows on two mutually exclusive
projects for the Bahamas Recreation Corporation (BRC). Both
projects require an annual return of 18 percent. Year Deepwater
Fishing New Submarine Ride 0 ?$ 1,035,000 ?$ 2,020,000 1 455,000
1,070,000 2 578,000 885,000 3 505,000 920,000 a-1. Compute the IRR
for both projects. (Do not round intermediate calculations. Enter
your answers as a percent rounded to 2 decimal places (e.g.,
32.16).) IRR Deepwater Fishing % Submarine Ride % a-2. Based on...

Consider the following cash flows on two mutually exclusive
projects for the Bahamas Recreation Corporation (BRC). Both
projects require an annual return of 18 percent.
Year
Deepwater Fishing
New Submarine Ride
0
−$
1,030,000
−$
2,010,000
1
450,000
1,060,000
2
574,000
880,000
3
500,000
910,000
Compute the NPV for both projects. (Do not round
intermediate calculations and round your answers to 2 decimal
places, e.g., 32.16.)
c-2.
Based on the NPV, which project should you choose?
...

Consider the following cash flows on two mutually exclusive
projects for the Bahamas Recreation Corporation (BRC). Both
projects require an annual return of 16 percent.
Year Deepwater New Sub Ride
0 −$ 995,000 −$ 1,940,000
1 415,000 990,000
2 546,000 845,000
3 465,000 840,000
a-1. Compute the IRR for both projects. (Do not round
intermediate calculations. Enter your answers as a percent rounded
to 2 decimal places, e.g., 32.16.)
IRR Deepwater Fishing _____ % Submarine Ride _______ %
Calculate the...

1.The Hyatt Group Inc., has identified the following two
mutually exclusive projects:
Cash
Flows Cash
Flows
Year Project
A Project
B
0 -$10,000 _$10,000
1 200 5,000
2 500 6,000
3 8,200 500
4 4,800 500
What is the IRR of each of these projects? If you
apply the IRR decision rule, which project should the company
accept? Is this decision necessarily correct?
If the required rate of return is 9 percent, what is the NPV of
each of the projects? Which project will you choose if
you apply the NPV decision rule?
Over what range...

Consider the following cash flows of two mutually exclusive
projects for Tokyo Rubber Company. Assume the discount rate for
both projects is 12 percent.
Year
Dry Prepreg
Solvent Prepreg
0
–$
1,800,000
–$
800,000
1
1,110,000
425,000
2
920,000
700,000
3
760,000
410,000
a.
What is the payback period for both projects? (Do not
round intermediate calculations. Round your answers to 2 decimal
places, e.g., 32.16.)
b.
What is the NPV for both projects? (Do not round...

You've estimated the following cash flows (in $) for two
mutually exclusive projects:
Year
Project A
Project B
0
-5,600
-8,400
1
1,325
1,325
2
2,148
2,148
3
4,193
8,192
The required return for both projects is 8%.
Part 1 : What is the IRR for project A? 3+ Decimals
Part 2 What is the IRR for project B? 3+ Decimals
Part 3 Which project seems better according to the IRR method?
Project A or Project B
Part 4 What...

Consider the following cash flows for two mutually exclusive
capital investment projects. The required rate of return is 16%.
Use this information for the next 3 questions. Year Project A Cash
Flow Project B Cash Flow 0 ($50,000) ($20,000) 1 15,000 6,000 2
15,000 6,000 3 15,000 6,000 4 13,500 5,400 5 13,500 5,400 6 6,750
5,400
Which of the following statements is true concerning projects A
and B?
a) Due to time disparity, IRR indicates that project A should...

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