Question

Wii Brothers, a game manufacturer, has a new idea for an adventure game. It can market the game either as a traditional board game or as an interactive DVD, but not both. Consider the following cash flows of the two mutually exclusive projects for the company. Assume the discount rate is 9 percent.

  

Year	Board Game			DVD
0	–$	1,550		–$	3,400
1		760			2,100
2		1,300			1,640
3		280			1,150

  

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

   

Answer 1

a). Calculating the Payback Period for each project:-

Year	Cash Flows of Board Game($)	Cummulative Cash Flows of Board Game ($)	Cash Flows of DVD ($)	Cummulative Cash Flows of DVD ($)
0	(1,550.00)	(1,550.00)	(3,400.00)	(3,400.00)
1	760.00	(790.00)	2,100.00	(1,300.00)
2	1,300.00	510.00	1,640.00	340.00
3	280.00	790.00	1,150.00	1,490.00
	790.00		1,490.00

Payback Period = Years before the Payback period occurs + (Cummulative cash flow in the year before recovery/Cash flow in the year before recovery)

Payback period for Board Game = 1 year + (790/1300)

= 1.61 years

Payback period for DVD = 1 year + (1300/1640)

= 1.79 years

b). Calculating the NPV of each Project:-

Year	Cash Flow of Board Game ($)	Cash Flow of DVD ($)	PV Factor @9%	Present Value of Board Game ($)	Present Value of DVD ($)
0	(1,550.00)	(3,400.00)	1.0000	(1,550.00)	(3,400.00)
1	760.00	2,100.00	0.9174	697.25	1,926.61
2	1,300.00	1,640.00	0.8417	1,094.18	1,380.36
3	280.00	1,150.00	0.7722	216.21	888.01
				457.64	794.97

So, NPV of Board game is $457.64

NPV of DVD is $794.97

- Calculating the IRR of the Project and Incremental IRR using EXCEL IRR FUNCTION:-

c). IRR of Board Game is 26.57%

IRR of DVD is 23.20%

d). Incremental IRR is 20.24%