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Cash flows on two mutually exclusive projects

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NPV versus 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 Submarine Ride 0 −$850,000 −$1,650,000 1 320,000 810,000 2 470,000 750,000 3 410,000 690,000 As a financial analyst for BRC, you are asked the following questions: If your decision rule is to accept the project with the greater IRR, which project should you choose? 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? To be prudent, you compute the NPV for both projects. Which project should you choose? Is it consistent with the incremental IRR rule?

Reference no: EM131055549

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