Problem 7-13 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 16 percent.

Year	Deepwater Fishing			New Submarine Ride
0	$	990,000		$	1,930,000
1		410,000			980,000
2		542,000			840,000
3		460,000			830,000

a-1. Compute the IRR for both projects. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

	IRR
Deepwater Fishing	%
Submarine Ride	%

a-2. Based on the IRR, which project should you choose?

• Submarine Ride

• Deepwater Fishing

b-1. Calculate the incremental IRR for the cash flows. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Incremental IRR %

b-2. Based on the incremental IRR, which project should you choose?

• Submarine Ride

• Deepwater Fishing

c-1. Compute the NPV for both projects. (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

	NPV
Deepwater Fishing	$
Submarine Ride	$

c-2. Based on the NPV, which project should you choose?

• Submarine Ride

• Deepwater Fishing

c-3. Is the NPV rule consistent with the incremental IRR rule?

• No

• Yes