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Incremental IRR rule

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You work for an outdoor play structure manufacturing company and are trying to decide between two projects:

Year End Cash Flows ( $thousands)

Project 0 1 2 IRR
_______________________________
Playhouse -30 15 20 10.4%
Fort -80 39 52 8.6%

You can undertake only one project. If your cost of capitol is 8%, use the incremental IRR rule to make the correct decision.

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Please see attached file:
You work for an outdoor play structure manufacturing company  and are trying to decide between two projects:

                                       Year End Cash Flows ( $thousands)

Project              0        1          2      IRR
_______________________________
Playhouse       -30      15        20   ...

Solution Summary

Uses the incremental IRR rule to make the investment decision.

$2.19
Similar Posting

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 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:
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 flows. Based on your computation, which project should you choose?

c. To be prudent, you compute the NPV for both projects. Which project shoul you choose? Is it consistent with the incremental IRR rule?

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