Calculate the incremental irr for the cash flows

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Reference no: EM133290492

Question 1. Consider the following cash flows on two mutually exclusive projects for the B.C. Recreation Corporation (BCRC). Both projects require an annual return of 14 percent.

Year	Deepwater fishing	New submarine ride
0	-$750,000	-$2,100,000
1	310,000	1,200,000
2	430,000	760,000
3	330,000	850,000

As a financial analyst for BCRC, you are asked to answer 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 should you choose? Is it consistent with the incremental IRR rule?

Question 2. Mario Brothers, a game manufacturer, has a new idea for an adventure game. It can market the game either as a traditional board game or as an interactive smartphone app but not both. Consider the following cash flows of the two mutually exclusive projects for Mario Brothers. Assume the discount rate for Mario Brothers is 10 percent:

Year	Board game	App
0	-$600	-$1,900
1	700	1,400
2	150	900
3	100	400

a) Based on the payback period rule, which project should be chosen?

b) Based on the NPV, which project should be chosen?

c) Based on the IRR, which project should be chosen?

d) Based on the incremental IRR, which project should be chosen?

Reference no: EM133290492

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