Required:
(a)
What is the IRR of the Project?
(Input answer as a percent rounded to 2 decimal places, without the
percent sign. For example 3.16)
IRR= 6.93
3.
Consider the following cash flows on two mutually exclusive projects for the Bahamas Recreation Corporation
(BRC). Both projects require an annual return of 15 percent.
Year
DEEPWATER
FISHING
NEW SUBMARINE
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 financial analyst for BRC, you are asked the following questions.
Requirement 1:
(a)
Calculate the IRR for Deepwater Fishing and New Submarine Ride.
(Input answer as a percent rounded
to 2 decimal places, without the percent sign.
The IRR is the interest rate that makes the NPV of the project equal to zero. So, the IRR for each
project is:
Deepwater Fishing IRR:
0 = C
0
+ C
1
/ (1 + IRR) + C
2
/ (1 + IRR)
2
+ C
3
/ (1 + IRR)
3
0 = –$600,000 + $270,000 / (1 + IRR) + $350,000 / (1 + IRR)
2
+ $300,000 / (1 + IRR)
3
Using a spreadsheet, financial calculator, or trial and error to find the root of the equation, we find
that:
IRR = 24.30%
Submarine Ride IRR:
0 = C
0
+ C
1
/ (1 + IRR) + C
2
/ (1 + IRR)
2
+ C
3
/ (1 + IRR)
3
0 = –$1,800,000 + $1,000,000 / (1 + IRR) + $700,000 / (1 + IRR)
2
+ $900,000 / (1 + IRR)
3
Using a spreadsheet, financial calculator, or trial and error to find the root of the equation, we find
that:
IRR = 21.46%
Based on the IRR rule, the deepwater fishing project should be chosen because it has the higher