Question

3: Net Present Value & Uther Investment Rules i Consider the following cash flows on two mutually exclusive projects for the Bahamas Recreation Corporation (BRC). Both projects require an annual return of 17 percent. Deepwater Fishing Year 0 1 2 1,020,000 440,000 566,000 490,000 New Submarine Ride 1,990,000 1,040,000 870,000 890,000 8-1. Compute the IRR for both projects (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) Deepwater Fishing Submarine Ride a-2. Bosed on the RR which project should you 1 of 10 e to search

Answer 1

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

A C D B Required return 17% Year Deepwater Fishing -$1,020,000.00 $440,000.00 $566,000.00 $490,000.00 -NmWooCEfm New Submarine Ride -$1,990,000.00 $1,040,000.00 $870,000.00 $890,000.00 Incremental -$970,000.00 $600,000.00 $304,000.00 $400,000.00 2 IRR Deepwater Fishing New Submarine Ride 21.42% 19.86% a.2 Choose Deepwater Fishing Incremental IRR 18.02% b.2 Choose New Submarine Ride NPV Deepwater Fishing New Submarine Ride $75,480.62 $90,125.47 Choose New Submarine Ride 25 C.3 Yes

Cell reference -

B Required return 0.17 Year Incremental Deepwater Fishing - 1020000 440000 566000 490000 New Submarine Ride -1990000 1040000 870000 890000 =D4-C4 =D5-C5 =D6-C6 =D7-C7 a. 1 Deepwater Fishing New Submarine Ride IRR =IRR(C4:07) =IRR(D4:D7) a.2 Choose Deepwater Fishing 13 14 15 16 b.1 Incremental IRR =IRR(E4:E7) b.2. Choose New Submarine Ride c.1 Deepwater Fishing New Submarine Ride NPV =C4+NPV(C1,C5:07) =D4+NPV(C1,D5:D7) c.2 Choose New Submarine Ride 25 c.3 Yes 26 27

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