Question

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 9 percent. Year Board Game DVD 0 –$ 800 –$ 1,900 1 610 1,350 2 500 950 3 130 400

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.)

Answer 1

a
Board game
Year	Cash flow stream	Cumulative cash flow
0	-800	-800
1	610	-190
2	500	310
3	130	440
Payback period is the time by which undiscounted cashflow cover the intial investment outlay
this is happening between year 1 and 2
therefore by interpolation payback period = 1 + (0-(-190))/(310-(-190))
1.38 Years
DVD
Year	Cash flow stream	Cumulative cash flow
0	-1900	-1900
1	1350	-550
2	950	400
3	400	800
Payback period is the time by which undiscounted cashflow cover the intial investment outlay
this is happening between year 1 and 2
therefore by interpolation payback period = 1 + (0-(-550))/(400-(-550))
1.58 Years
b
Board game
Discount rate	0.09
Year	0	1	2	3
Cash flow stream	-80000.00%	610	500	130
Discounting factor	1	1.09	1.1881	1.295029
Discounted cash flows project	-800	559.633	420.84	100.3839
NPV = Sum of discounted cash flows
NPV Board game =	280.86
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
DVD
Discount rate	0.09
Year	0.00%	1	2	3
Cash flow stream	-1900	1350	950	400
Discounting factor	100.00%	1.09	1.1881	1.295029
Discounted cash flows project	-1900	1238.532	799.596	308.8734
NPV = Sum of discounted cash flows
NPV DVD =	447
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
c
Board game
IRR is the rate at which NPV =0
IRR	0.326175564
Year	0	1	2	3
Cash flow stream	-800	610	500	130
Discounting factor	1	1.326176	1.758742	2.3324
Discounted cash flows project	-800	459.9693	284.2942	55.73658
NPV = Sum of discounted cash flows
NPV Board game =	1.72097E-05
Where
Discounting factor =	(1 + IRR)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
IRR=	32.62%
DVD
IRR is the rate at which NPV =0
IRR	0.246918464
Year	0	1	2	3
Cash flow stream	-1900	1350	950	400
Discounting factor	1	1.246918	1.554806	1.938716
Discounted cash flows project	-1900	1082.669	611.0088	206.3221
NPV = Sum of discounted cash flows
NPV DVD =	8.76788E-07
Where
Discounting factor =	(1 + IRR)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
IRR=	24.69%
d
DVD-Board game Cash flow values are as follows
Year	Cash flow stream
0	-1100
1	740
2	450
3	270
Incremental IRR is calculated based on difference of the cash flow of the two projects
Incremental CF
IRR is the rate at which NPV =0
IRR	0.189893938
Year	0	1	2	3
Cash flow stream	-1100	740	450	270
Discounting factor	1	1.189894	1.415848	1.684708
Discounted cash flows project	-1100	621.9042	317.8308	160.2651
NPV = Sum of discounted cash flows
NPV Incremental CF =	0.000107303
Where
Discounting factor =	(1 + IRR)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
IRR=	18.99%