NPV versus IRR Consider the following cash fl ows on two mutually exclusive projects for the Bahamas Recreation Corporation (BRC). Both projects require an annual return of 15 percent.

Deepwater New Submarine Year Fishing Ride 0 $600,000 $1,800,000 1 270,000 1,000,000 2 350,000 700,000 3 300,000 900,000 As a fi nancial 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 fl ows. 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?

 LO.1