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NPV versus IRR Consider the following cash flows on two mutually exclusive projects for the Bahamas Recreation Corporation. Both projects require an annual return of
- NPV versus IRRConsider the following cash flows on two mutually exclusive projects for the Bahamas Recreation Corporation. Both projects require an annual return of 15 percent.
YEAR | DEEPWATER FISHING | NEW SUBMARINE RIDE |
0 | $835,000 | $1,650,000 |
1 | 450,000 | 1,050,000 |
2 | 410,000 | 675,000 |
3 | 335,000 | 520,000 |
As a financial analyst for the company, you are asked the following questions.
- If your decision rule is to accept the project with the greater IRR, which project should you choose?
- Since you are fully aware of the IRR rules 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?
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