Question

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 incremental IRR for the cash flows. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Incremental IRR _______%

Answer 1

a-1.

Deepwater

IRR=-995000+(415000/(1+r)^1)+(546000/(1+r)^2)+(465000/(1+r)^3)

IRR=0.19943

19.94%

New Sub Ride

IRR=-1940000+(990000/(1+r)^1)+(845000/(1+r)^2)+(840000/(1+r)^3)

IRR=0.18567

18.57%

IRR

Deepwater

19.94%

New Sub Ride

18.57%

Incremental IRR
Year	Deepwater	New Sub Ride	Incremental cash flow
	1	2	(2-1)
0	-995000	-1940000	-945000
1	415000	990000	575000
2	546000	845000	299000
3	465000	840000	375000
	19.94%	18.57%	16.93%

IRR of the Incremental cash flows =-945000+(575000/(1+r)^1)+(299000/(1+r)^2)+(375000/(1+r)^3)

IRR=

16.93%