Problem: Consider the following cash flows on two mutually exclusive projects for the Bahamas Recreation Corporation (BRC). Both projects require an annual return of 15 percent.
Year Deepwater Fishing New Submarine Ride
0 -$600,000 -$1,800,000
1 270,000 1,000,000
2 350,000 700,000
3 300,000 900,000
As a financial analyst for BRC, 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?
b. Because 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 shoul you choose? Is it consistent with the incremental IRR rule?