Question

Consider two mutually exclusive new product launch projects that Nagano Golf is considering. Assume the discount rate for both projects is 13 percent.

Project A:	Nagano NP-30.
	Professional clubs that will take an initial investment of $950,000 at Time 0. Introduction of new product at Year 6 will terminate further cash flows from this project.

Project B:	Nagano NX-20.
	High-end amateur clubs that will take an initial investment of $691,000 at Time 0. Introduction of new product at Year 6 will terminate further cash flows from this project.

Year	NP-30			NX-20
0	–$	950,000		–$	691,000
1		345,000			268,000
2		335,000			273,000
3		310,000			260,000
4		305,000			240,000
5		215,000			186,000

a. Complete the following table: (Do not round intermediate calculations. Enter the IRR as a percent. Round your profitability index (PI) answers to 3 decimal places, e.g., 32.161, and other answers to 2 decimal places, e.g., 32.16.)

	NP-30			NX-20
NPV	$			$
IRR		%			%
PI

b. What is the incremental IRR of investing in the larger project (percentage)?

Answer 1

Note: With mutually exclusive projects the company should invest in Project "NX-20" as the absolute value in the NPV and the relative value in the form IRR (%) are both higher than "NP-30".

Incremental IRR of the higher project is 3%