Question

Consider the following cash flows of two mutually exclusive projects for Spartan Rubber Company. Assume the discount rate for both projects is 7 percent.

Year	Dry Prepreg			Solvent Prepreg
0	–$	1,890,000		–$	900,000
1		1,119,000			470,000
2		938,000			790,000
3		769,000			428,000

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.)

	Payback period
Dry Prepreg	years
Solvent Prepreg	years

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.)

	NPV
Dry Prepreg	$
Solvent Prepreg	$

c. What is the IRR for each project? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

	IRR
Dry Prepreg	%
Solvent Prepreg	%

d. Calculate the incremental IRR for the cash flows. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Incremental IRR             %

Answer 1

Pay Back Period = years full recovery + unrecovered cost at beginning of last year                                                  cash flow in following year

Dry Prepreg Pay Back Period = 1 + (771000 / 938000)                            = 1.82 years. NPV = (1119000 * 0.9345) + ( 938000 * 0.8734) + ( 769000 * 0.8163) - 1890000      = 1045705.5 + 819249.2 + 627734.7 – 1890000     = 602689.40 IRR should be such that Outflow = Inflow and NPV = 0. So, the IRR is =~ 25 % Solvent Prepreg Pay Back Period = 1 + (430000 / 790000)                            = 1.54 years. NPV = (470000 * 0.9345) + ( 790000 * 0.8734) + ( 428000 * 0.8163) - 900000      = 439215 + 689986 + 349376.4 – 900000     = 578577.40 IRR should be such that Outflow = Inflow and NPV = 0. So, the IRR is =~ 39.50 %