Using the BA II Plus calculator...
NPV verses 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
|
Deepwater Fishing
|
New Submission Ride
|
|
0
|
-$950,000
|
-1,850,000
|
|
1
|
370,000
|
900,000
|
|
2
|
510,000
|
800,000
|
|
3
|
420,000
|
750,000
|
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 computations, which project should you chose?
c) To be prudent, you compute the NPV for both projects. Which project should you choose? Is it consistent with the incremental IRR rule?