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

Payaback period = Period in which initial investment is recovered.

Board Game:

Pay back period = Year in which Least +ve Cls OS + [ CLs OS at that year / AMount recovered in Next year ]

= 1 Year + [ 550 / 1000 ] Years

= 1 Year + 0.55 Year

= 1.55 Years

DVD:

Pay back period = Year in which Least +ve Cls OS + [ CLs OS at that year / AMount recovered in Next year ]

= 1 Year + [ 1000 / 1580 ] Years

= 1 Year + 0.63 Year

= 1.63 Years

Board Games is selected as it is aving less Payback period.

IRR = Rate at which NPV is "0"

IRR = rate at which least +ve NPV + [ NPV at that rate / Change in NPV due to inc of 1% in rate ] * 1%

= 28% + [ 12.13 / 16.09 ] * 1%

= 28.% + 0.75%

= 12.75%

DVD:

IRR = rate at which least +ve NPV + [ NPV at that rate / Change in NPV due to inc of 1% in rate ] * 1%

= 27% + [ 11.89 / 35.97 ] * 1%

= 27% + 0.33%

= 27.33%

Baord Games is selcted as IRR is more.