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Wii Brothers, a game manufacturer, has a new idea for an adventure game
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Wii Brothers, a game manufacturer, has a new idea for an adventure game. It can market the game either as a traditional board game or as an interactive DVD, but not both. Consider the following cash flows of the two mutually exclusive projects for the company. Assume the discount rate is 8 percent. |
| Year | Board Game | DVD | ||||
| 0 | –$ | 1,250 | –$ | 2,800 | ||
| 1 | 700 | 1,800 | ||||
| 2 | 1,000 | 1,580 | ||||
| 3 | 220 | 850 | ||||
| a. |
What is the payback period for each project? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) |
| b. | What is the NPV for each project? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) |
| c. | What is the IRR for each project? (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) |
| d. | What is the incremental IRR? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) |
Expert Solution
| Given: | ||||||||||
| Discount Rate | 8% | |||||||||
| Cashflows for both projects: | ||||||||||
| Year: | 0 | 1 | 2 | 3 | ||||||
| Board Game | -1250 | 700 | 1000 | 220 | ||||||
| Cummulative Cashflow | -1250 | -550 | 450 | |||||||
| PV | -1250 | 648.1481 | 857.3388 | 174.6431 | ||||||
| NPV | 430.1301 | |||||||||
| Payback Period = Year after which the initial outlay was recovered + Recovery period amount upto I / Total Cashflow for that year | ||||||||||
| Payback Period = 1 + 450/1000 = 1.45 years | ||||||||||
| IRR = Cashflows/(1+r)^n - Initial Investment | ||||||||||
| where, r is the dicount rate and n is the time period. | ||||||||||
| IRR = | 28.75% | |||||||||
| Year: | 0 | 1 | 2 | 3 | ||||||
| DVD | -2800 | 1800 | 1580 | 850 | ||||||
| Cummulative Cashflow | -2800 | -1000 | 580 | 1430 | ||||||
| PV | -2800 | 1666.667 | 1354.595 | 674.7574 | ||||||
| NPV | 896.0194 | |||||||||
| Payback Period = Year after which the initial outlay was recovered + Recovery period amount upto I / Total Cashflow for that year | ||||||||||
| Payback Period = 1 + 1000/1580 = 1.63 years | ||||||||||
| IRR = Cashflows/(1+r)^n - Initial Investment | ||||||||||
| where, r is the dicount rate and n is the time period. | ||||||||||
| IRR = | 27.33% | |||||||||
| Year: | 0 | 1 | 2 | 3 | ||||||
| Incremental Cashflows of B over A | -1550 | 1100 | 580 | 630 | ||||||
| Incremental IRR | 26.16% | |||||||||
| Therefore, we have: | ||||||||||
| Board Game | DVD | |||||||||
| Payback Period | 1.45 yrs | 1.63 yrs | ||||||||
| NPV | 430.1301 | 896.0194 | ||||||||
| IRR | 28.75% | 27.33% | ||||||||
| Incremental IRR | 26.16% |
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