Question

Consider two mutually exclusive new product launch projects that Nagano Gold is considering. Assume the discount rate for both products is 17 percent.

Project A: Nagano NP-30

Professional clubs that will take an initial investment of $616,000 at Year 0. For each of the next 5 years, (Years 1-5), sales will generate a consistent cash flow of $245,000 per year. Introduction of new product at Year 6 will terminate further cash flows from this project.

Project B: Nagano NX-20.

High-end amateur clubs that will take an initial investment of $530,000 at Year 0. Cash flow at Year 1 is $160,000. In each subsequent year, cash flow will grow at 10 percent per year. Introduction of new product at Year 6 will terminate further cash flows from this project.

Year NP-30 NX-20

0 -$610,000   -$530,000

1 245,000 160,000

2 245,000 176,000

3 245,000 193,600

4 245,000 212,960

5 245,000 234,256

Complete the following table: ( Do not round intermediate calculations. Round your "PI" answers to 3 decimal places, e.g., 32.161, and other answers to 2 decimal places, e.g., 32.16. Enter your IRR answers as a percent.)

NP-30 NX-20

Payback __________ years _________ years

IRR __________ % _________%

PI ___________ ___________

NPV ___________ ___________

Answer 1

NPV tells about the value added by the project to the firm. It is calculated by discounting th future cash flows to their present values and subtracting the initial investment from it.

IRR denotes the discount rate at which NPV = 0.

Payback Period denotes the time period at which the initial investment amount is recovered. It occurs in the year when the sign of the cumulative cashflow changes from negative to positive.

PI denotes the profitability of the project with respect to the initial investment. It is the ratio of the present of future cashflows to the initial investment.

The calculations are done using excel