Question

Mario Brothers, a game manufacturer, has a new idea for an adventure game. It can either market the game as a traditional board game or as an interactive DVD, but not both. Consider the following cash flows of the two mutually exclusive projects. Assume the discount rate for both projects 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.)

	Payback period
Board game	________ years
DVD	________ years

What is the incremental IRR? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Incremental IRR _________ %

Answer 1

The Payback period is defined as the number of years required for the

cumulative cash inflows to be equal to the cash outflows.

Payback period is the length of time required to recover the initial cost of the project.

Board Game: The cumulative cash inflow for the second year is $1,700.

For the second year, the annual cash inflow is $1,000.

Cash Inflow of $ 550 is sufficient to make the cumulative cash inflow to be $1,250.

Payback period is 1 + (550/1000) or 1.55.

Payback period for Board Game is 1.55 years.

DVD: The cumulative cash inflow for the second year is $3,380.

For the second year, the annual cash inflow is $1,580.

Cash Inflow of $ 1,000 is sufficient to make the cumulative cash inflow to be $3,380.

Payback period is 1 + (1000/1580) or 1.63.

Payback period for DVD is 1.63 years.

In the IRR technique, the future cash inflows are discounted in such a way that the

total present value of cash inflow is equal to the present value of cash outflows.

Incremental IRR = 28.79-27.39 = 1.40