Question $511$ NPV versus IRR: Consider the following cash flows on two mutually exclusive projects for the Bahamas Recreation Corporation $($BRC$).$ Both projects require an annual return of $14$ percent.

Year Deepwater Fishing New Submarine Ride

$0-$$$875,000-$$$1,650,000$

$1330,000890,000$

$2480,000730,000$

$3440,000590,000$

As a financial analyst for the company, you are asked the following questions:

$1)$ If your decision rule if to accept the project with the greater IRR, which project should you choose?

a$)$ Based on the Excel spreadsheet formulas below of IRR, we should select Deepwater Fishing.

Year Deepwater Fishing

$0($$$875,000)$

$1330,000$ IRR$=19\%$

$2480,000$

$3440,000$

Year New Submarine Ride

$0($$$1,650,000)$

$1890,000$ IRR$=17\%$

$2730,000$

$3590,000$

$2)$ 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?

Incremental Cash Flows

a$)$ Year $0=-$$$1,650,000(-$$$875,000)=-775,000$

b$)$ Year $1=$ $$890,000$ $$330,000=$ $$560,000$

c$)$ Year $2=$ $$730,000$ $$480,000=$ $$250,000$

d$)$ Year $3=$ $$590,000$ $$440,000=$ $$150,000$

$3)$ To be prudent, you compute the NPV for both projects. Which project should you choose? Is it consistent with the incremental IRR rule?