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 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.)

Board game years

DVD years

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.)

Board game $

DVD $

c. What is the IRR for each project? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

Board game %

DVD %

d. 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

a)Payback period
Year	Board Game	Cumlative cash Flow
0	-800	-800
1	610	-190
2	500	440
3	130	570
Paybackperiod =190/500+1		1.38
Year	DVD	Cumlative cash Flow
0	-1,900	-1,900
1	1,350	-550
2	950	440
3	400	840
Payback period =550/950+1		1.58

	Payback period
Board Game	1.38
DVD	1.58

b) NPV for each project
Year	Board Game	PV factor 9%	PV
0	-800	1	-800.00
1	610	0.9174	559.63
2	500	0.8417	420.84
3	130	0.7722	100.38
			280.86
Year	DVD	PV factor 9%	PV
0	-1,900	1	-1,900.00
1	1,350	0.9174	1,238.53
2	950	0.8417	799.60
3	400	0.7722	308.87
NPV			447.00

	NPV
Board Game	280.86
DVD	447

C) IRR
Year	Board Game	PV factor 9%	PV	PV factor 32.60%	PV
0	-800	1	-800.00	1	-800.00
1	610	0.9174	559.63	0.7541	460.03
2	500	0.8417	420.84	0.5687	284.37
3	130	0.7722	100.38	0.4289	55.76
NPV			280.86		0.16
Year	DVD	PV factor 9%	PV	PV factor 24.65%	PV
0	-1,900	1	-1,900.00	1	-1,900.00
1	1,350	0.9174	1,238.53	0.8022	1,083.03
2	950	0.8417	799.60	0.6436	611.42
3	400	0.7722	308.87	0.5163	206.53
		NPV	447.00		0.98

Year	Board Game	DVD
0	-800	-1,900
1	610	1,350
2	500	950
3	130	400
IRR	32.60%	24.65%
IRR using RR Excel Funtion

d) incremental IRR
Year	Board Game	DVD	Incremental Cash Flow	PV factor 18.95%	PV
0	-800	-1,900	-1,100	1	-1,100.00
1	610	1,350	740	0.8407	622.11
2	500	950	450	0.7068	318.04
3	130	400	270	0.5942	160.42
IRR	32.60%	24.65%	18.95%	NPV	0.58
Incremental IRR =18.95%