Use the table for the question(s)below.
Consider the following two projects with cash flows in $:
-The maximum number of incremental IRRs that could exist for project B over project A is:
A)1.
B)2.
C)0.
D)3.

Question

Use the table for the question(s)below.
Consider the following two projects with cash flows in $: 
-The maximum number of incremental IRRs that could exist for project B over project A is:
A)1. 
B)2. 
C)0. 
D)3.

Quizplus · Accepted Answer

To compare the two projects using incremental IRR, we need to find the IRR of the cash flows that differ between the projects.

For Year 1, project A has a cash flow of $-100 while project B has a cash flow of -$200. This means that the incremental cash flow for Year 1 is $100, which gives an IRR of 100%.

For Year 3, project A has a cash flow of $500 while project B has a cash flow of $200. This means that the incremental cash flow for Year 3 is -$300, which gives an IRR of -42.2%.

For the entire project, project A has an IRR of 64.7% and project B has an IRR of 57.9%.

There are two possible incremental IRRs for project B over project A: 100% and -42.2%. Therefore, the answer is B.

As for the best choice, it depends on the investor's preferences. If the investor is risk-averse and prefers a higher return, then project A with an IRR of 64.7% would be the best choice. However, if the investor is willing to take on more risk for a potentially higher return, then project B with an IRR of 57.9% and the possibility of a higher incremental IRR could be the best choice.

Use the Table for the Question(s)below