Question

Consider the following cash flows on two mutually exclusive projects for the B.C. Recreation Corporation (BCRC). Both 7.11 an annual return of 14 percent. projects require Deepwater fishing New submarine ride Year -$750,000 -$2,100,000 1 310,000 1,200,000 430,000 760,000 2 3 330,000 850,000 As a financial analyst for BCRC, you are asked to answer the following questions: 1. If your decision rule is to accept the project with the greater IRR, which project should you choose? 2. 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? 3. To be prudent, you compute the NPV for both projects. Which project should you choose? Is it consistent with the incremental IRR rule?

Please include calculations. Thanks

Answer 1

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projects (Autosaved) (Autosaved) (Autosaved) - Microsoft Excel (Product Activation Failed) Review File Home Insert Page Layout Formulas Data View Add-Ins E AutoSum Cut А А A* Wrap Text Calibri 11 General ECopy Fill Conditional Format Formatting as Table Styles Merge & Center Insert Delete Format Paste в IU" A +.0 .000 0C Cell Sort & Find & Filter Select % Format Painter Clear Number Clipboard Font Alignment Styles Cells Editing Г ET104 ET EU EV EW EX EY EZ FA FB 100 101 DEEPWATER NEW SUBMARINE 102 В-А FISHING RIDE CFAT 103 YEAR CFAT INCREMENTAL CFAT -750000 -1350000 104 0 -2100000 310000 105 1 1200000 890000 106 2 430000 760000 330000 107 3 330000 850000 520000 14% 14% 14% 108 RATE 15.78% [=IRR(EZ104:EZ107)] 19.83% 109 IRR 17.36% 110 111152.69 NPV 75541.46 [NPV(EX108,EX105:EX107) +EX104] 111 112 a-1 IRR DEEPWATER 19.83% 113 17.36% 114 SUBMARINE 115 a-2 IRR IS HIGHER FOR DEEPWATER FISHING, SO DEEPWATER FISHING SHOULD BE SELECTED 116 b-1, b-2 INCREMENTAL IRR = 15.78%, WHICH INDICATES THAT SUBMARINE RIDE SHOULD BE SELECTED 117 118 BECAUSE COST OF CAPITAL INCREMENTAL IRR 119 IRRnpvbetaPVFV invest, EAA MIRR NPV IRR REPLACEMENT S REPO EAC MACRS wacc BOND STEIN indiffEPS EBIT RATION PBP ARR HPR GMAM LEASE RATIOCASHBUDGET erences: SM219 II Rea 120% - WA 10:33 CENG 26-09-2019

projects (Autosaved) (Autosaved) (Autosaved) - Microsoft Excel (Product Activation Failed) Review File Home Insert Page Layout Formulas Data View Add-Ins E AutoSum Cut A* Wrap Text Calibri 11 General ECopy Fill 1E Merge & Center Insert Delete Format Paste B I U +.0 .000 0C Conditional Format Cell Sort & Find & Filter Select % Format Painter Clear Formatting as Table Styles Editing Clipboard Font Alignment Number Styles Cells ET112 ET EU EV EW EX EY EZ FA FB 112 a-1 IRR DEEPWATER 19.83% 113 17.36% 114 SUBMARINE 115 a-2 IRR IS HIGHER FOR DEEPWATER FISHING, SO DEEPWATER FISHING SHOULD BE SELECTED 116 b-1, b-2 INCREMENTAL IRR = 15.78%, WHICH INDICATES THAT SUBMARINE RIDE SHOULD BE SELECTED 117 118 BECAUSE COST OF CAPITAL< INCREMENTAL IRR 119 120 c-1 NPV DEEPWATER 75541.46 SUBMARINE 121 111152.69 122 c-2 ACCORDING TO NPV, SUBMARINE RIDE SHOULD BE SELECTED 123 124 c-3 YES, IT MATCHES WITH INCREMENTAL IRR 125 126 127 128 129 130 131 4 IRRnpvbetaPVFV REPO invest, EAA STEIN indiffEPS EBIT RATION PBP ARR MIRR NPV IRR REPLACEMENT S HPR GMAM EAC MACRS LEASE RATIOCASHBUDGET wacc BOND E erences: SM219 II Rea 120% - WA 10:33 CENG 26-09-2019