Question

Consider the following cash flows of two mutually exclusive projects for Tokyo Rubber Company. Assume the discount rate for both projects is 8 percent.

Year	Dry Prepreg			Solvent Prepreg
0	–$	1,810,000		–$	805,000
1		1,111,000			430,000
2		922,000			710,000
3		761,000			412,000

  

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.)

    

	Payback period
Dry Prepeg	years
Solvent Prepeg	years

        

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

    

	NPV
Dry Prepeg	$
Solvent Prepeg	$

      

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.)

     

	IRR
Dry Prepeg	%
Solvent Prepeg	%

      

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.)

  

Incremental IRR

%

   

Answer 1

a)	DRY PREPEG:
	Year	Cash flow	Cumulative Cash flow
	0	-1810000	-1810000
	1	1111000	-699000
	2	922000	223000
	3	761000	984000
	Payback period = 1+699000/922000 = 1.76 years.
	SOLVENT PREPREG:
	Year	Cash flow	Cumulative Cash flow
	0	-805000	-805000
	1	430000	-375000
	2	710000	335000
	3	412000	747000
	Payback period = 1+375000/710000 = 1.53 years.
b)	DRY PREPEG:
	Year	Cash flow	PVIF at 8%	PV at 8%
	0	-1810000	1.00000	-1810000
	1	1111000	0.92593	1028704
	2	922000	0.85734	790466
	3	761000	0.79383	604106
			NPV	613276
	SOLVENT PREPREG:
	Year	Cash flow	PVIF at 8%	PV at 8%
	0	-805000	1.00000	-805000
	1	430000	0.92593	398148
	2	710000	0.85734	608711
	3	412000	0.79383	327059
			NPV	528918
c)	IRR is that discount rate for which NPV is 0. It has to be found out by trial and error, as below:
	DRY PREPEG:
	Year	Cash flow	PVIF at 30%	PV at 30%	PVIF at 28%	PV at 28%	PVIF at 27%	PV at 27%
	0	-1810000	1.00000	-1810000	1.00000	-1810000	1.00000	-1810000
	1	1111000	0.76923	854615	0.78125	867969	0.78740	874803
	2	922000	0.59172	545562	0.61035	562744	0.62000	571641
	3	761000	0.45517	346381	0.47684	362873	0.48819	371513
			NPV	-63441		-16414		7957
	IRR lies between 28% and 27%.
	By simple interpolation IRR = 27+7957/(16414+7957) =					27.33%
	SOLVENT PREPREG:
	Year	Cash flow	PVIF at 40%	PV at 40%	PVIF at 41%	PV at 41%	PVIF at 42%	PV at 42%
	0	-805000	1.00000	-805000	1.00000	-805000	1.00000	-805000
	1	430000	0.71429	307143	0.70922	304965	0.70423	302817
	2	710000	0.51020	362245	0.50299	357125	0.49593	352113
	3	412000	0.36443	150146	0.35673	146974	0.34925	143891
			NPV	14534		4063		-6180
	IRR lies between 41% and 42%.
	By simple interpolation, IRR = 41+4063/(4063+6180) =					41.40%
d)	INCREMENTAL IRR -- DRY PREPREG - SOLVENT PREPREG:
	Year	Cash flow	PVIF at 15%	PV at 15%	PVIF at 14%	PV at 14%	PVIF at 13%	PV at 13%
	0	-1005000	1.00000	-1005000	1.00000	-1005000	1.00000	-1005000
	1	681000	0.86957	592174	0.87719	597368	0.88496	602655
	2	212000	0.75614	160302	0.76947	163127	0.78315	166027
	3	349000	0.65752	229473	0.67497	235565	0.69305	241875
			NPV	-23050		-8939		5556
	Incremental IRR = 13+5556/(8939+5556) =				13.38%