# Break-Even, Capital Budgeting, Net Present Value, Internal Rate of Return

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1. Answer in Excel. 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____Deep water Fishing____New Submarine Ride

0_______-$950,000___________-$1,850,000

1________ 370,000______________900,000

2_______ _510,000______________ 800,000

3________ 420,000______________750,000

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 should your choose? Is it consistent with the incremental IRR rule?

2. Capital budgeting with Inflation: Consider the following cash flows on two mutually exclusive projects:

Year_______Project A________Project B

0_________-$50,000_________-$65,000

1___________30,000__________29,000

2___________25,000__________38,000

3___________20,000__________41,000

The cash flows of project A are expressed in real terms, whereas those of project B are expressed in nominal terms. The appropriate nominal discount rate is 13 percent and the inflation rate is 4 percent.

a. Which project should you choose?

3. Calculating Break-even: In each of the following cases, find the unknown variable. Ignore taxes.

Accounting_____________Unit Vvariable____

Bread-even___Unit Price____Cost___________Fixed Costs____Depreciation

95,300_________$41_______$30____________$ 820,000________?______

143,806___________?_______56_____________ 2,750,000___$1,150,000

__7,835__________97________?_______________160,000_____ 150,000

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Break-Even, Capital Budgeting, Net Present Value and Internal Rate of Return are analyzed.

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