Question

Hasbro is considering a new high-profile marketing project to aggressively market a card game version of Monopoly called Monopoly Deal. The Marketing department would spend an extra $1.0 million per year for the next five years to increase TV commercials and print ads featuring Monopoly Deal. The primary Monopoly factory would be expanded at a cost of $5.5 million to manufacture more of the games. Assume that the factory expansion would be completed in the first year of the project. The Marketing department estimates that the marketing campaign will increase Hasbro sales enough to bring in additional cash inflows of $2.5 million per year for the five-year period. Hasbro uses a discount rate of 15% to evaluate projects such as this one. Use a 5-year time horizon, and assume no salvage value of the factory expansion at the end of this period.

1. What is the net present value (NPV) of the project?

2. Based on this NPV, should Hasbro undertake this project?

3. What is the internal rate of return (IRR) of this project? You can find IRR by varying the discount rate in your table until NPV is zero. That new discount rate will be the IRR. Your grade will be based on the completeness of your cash flow table and calculations as well as your answers above.

Answer 1

1)Calculation of NPV
Year	Cash inflow	Cash outflow	Net Cash Flow	PVF @ 15%	Present Value
a	b	c	d=b-c	e	d*e
0	-	5,500,000	(5,500,000)	1	(5,500,000)
1	2,500,000	1,000,000	1,500,000	0.8695652	1,304,348
2	2,500,000	1,000,000	1,500,000	0.7561437	1,134,216
3	2,500,000	1,000,000	1,500,000	0.6575162	986,274
4	2,500,000	1,000,000	1,500,000	0.5717532	857,630
5	2,500,000	1,000,000	1,500,000	0.4971767	745,765
				NPV	($471,767.35)
NPV of the Project = - $471,767.35
2)Decision
Hasbro should not undertake this project since the Present value of net benefit attained from the project will be negative. For a project to be accepted, net benefit should be positive.
3)Calculation of IRR
IRR is that rate of return at which Net Present value becomes zero. It is the minimum desired return by an organisation.
IRR is calculated using Excel formula and arrived at 11.31642%. Then substituting on the NPV table
Year	Cash inflow	Cash outflow	Net Cash Flow	PVF @ 11.31642%	Present Value
a	b	c	d=b-c	e	d*e
0	$0.00	$5,500,000.00	($5,500,000.00)	1.000	(5,500,000)
1	$2,500,000.00	$1,000,000.00	$1,500,000.00	0.898	1,347,510
2	$2,500,000.00	$1,000,000.00	$1,500,000.00	0.807	1,210,522
3	$2,500,000.00	$1,000,000.00	$1,500,000.00	0.725	1,087,461
4	$2,500,000.00	$1,000,000.00	$1,500,000.00	0.651	976,910
5	$2,500,000.00	$1,000,000.00	$1,500,000.00	0.585	877,597
			11.31642%	NPV	(0)