Question

Consider the following cash flows of two mutually exclusive projects for Tokyo Rubber Company. Assume the discount rate for both projects is 12 percent.

Year	Dry Prepreg			Solvent Prepreg
0	–$	1,800,000		–$	800,000
1		1,110,000			425,000
2		920,000			700,000
3		760,000			410,000

  

a.	What is the payback period for both projects? (Do not round intermediate calculations. Round your answers to 2 decimal places, e.g., 32.16.)

   

b.	What is the NPV for both projects? (Do not round intermediate calculations. Round your answers to 2 decimal places, e.g., 32.16.)

   

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

   

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

   

Answer 1

a.  Payback period formula = Years before recovery + Cost not covered in that year/ Cash flow for that year
Pay back Dry Prepreg =2+(1800000-1110000-920000)/760000=1.70 years
Pay back Solvent Prepreg=1+(800000-425000)/700000 =1.54 years

b. NPV of Dry Prepreg =PV of Cash Flows -Initial Investment =1110000/(1+12%)+920000/(1+12%)^2+760000/(1+12%)^3-1800000=465442.78
NPV of Solvent Prepreg =PV of Cash Flows -Initial Investment =425000/(1+12%)+700000/(1+12%)^2+410000/(1+12%)^3-800000=429329.90

c. IRR of Dry Prepreg using financial calculator
CF0=-1800000;CF1=1110000;CF2=920000;CF3=760000;CPT IRR =27.63%
IRR of Solvent Prepreg using financial calculator
CF0=-800000;CF1=425000;CF2=700000;CF3=80000;CPT IRR =40.98%

d. Incremental cash flows CF0=-1800000+800000=-1000000
CF1=1110000-425000=685000
CF2=920000-700000=220000
CF3=760000-410000=350000
Incremental IRR using financial calculator
CF0=-1000000;CF1=685000;CF2=220000;CF3=350000;CPT IRR =14.45%