Question

Consider the following cash flows of two mutually exclusive projects for Tokyo Rubber Company. Assume the discount rate for both projects is 7 percent.

Year	Dry Prepreg			Solvent Prepreg
0	–$	1,870,000		–$	835,000
1		1,117,000			460,000
2		934,000			770,000
3		767,000			424,000

  

a.	What is the payback period for both projects? (Do not round intermediate calculations. Round your answers to 2 decimal places, e.g., 32.16.)

b.	What is the NPV for both projects? (Do not round intermediate calculations. Round your answers to 2 decimal places, e.g., 32.16.)

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

d.	Calculate the incremental IRR for the cash flows. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Answer 1

a
Dry
Year	Cash flow stream	Cumulative cash flow
0	-1870000	-1870000
1	1117000	-753000
2	934000	181000
3	767000	948000
Payback period is the time by which undiscounted cashflow cover the intial investment outlay
this is happening between year 1 and 2
therefore by interpolation payback period = 1 + (0-(-753000))/(181000-(-753000))
1.81 Years
Solvent
Year	Cash flow stream	Cumulative cash flow
0	-835000	-835000
1	460000	-375000
2	770000	395000
3	424000	819000
Payback period is the time by which undiscounted cashflow cover the intial investment outlay
this is happening between year 1 and 2
therefore by interpolation payback period = 1 + (0-(-375000))/(395000-(-375000))
1.49 Years
b
Dry
Discount rate	0.07
Year	0	1	2	3
Cash flow stream	-1870000	1117000	934000	767000
Discounting factor	1	1.07	1.1449	1.225043
Discounted cash flows project	-1870000	1043925	815791.8	626100.5
NPV = Sum of discounted cash flows
NPV Dry =	615817.48
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
Solvent
Discount rate	0.07
Year	0	1	2	3
Cash flow stream	-835000	460000	770000	424000
Discounting factor	1	1.07	1.1449	1.225043
Discounted cash flows project	-835000	429906.5	672547.8	346110.3
NPV = Sum of discounted cash flows
NPV Solvent =	613564.66
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
c
Dry
IRR is the rate at which NPV =0
IRR	0.255416709
Year	0	1	2	3
Cash flow stream	-1870000	1117000	934000	767000
Discounting factor	1	1.255417	1.576071	1.978626
Discounted cash flows project	-1870000	889744.4	592612.9	387642.7
NPV = Sum of discounted cash flows
NPV Dry =	1.76951E-08
Where
Discounting factor =	(1 + IRR)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
IRR=	25.54%
Solvent
IRR is the rate at which NPV =0
IRR	0.43785288
Year	0	1	2	3
Cash flow stream	-835000	460000	770000	424000
Discounting factor	1	1.437853	2.067421	2.972647
Discounted cash flows project	-835000	319921.5	372444.7	142633.8
NPV = Sum of discounted cash flows
NPV Solvent =	0.000909718
Where
Discounting factor =	(1 + IRR)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
IRR=	43.79%
d
Solvent-Dry Cash flow values are as follows
Year	Cash flow stream
0	1035000
1	-657000
2	-164000
3	-343000
Incremental IRR is calculated based on difference of the cash flow of the two projects
Incremental CF
IRR is the rate at which NPV =0
IRR	0.071387783
Year	0	1	2	3
Cash flow stream	1035000	-657000	-164000	-343000
Discounting factor	1	1.071388	1.147872	1.229816
Discounted cash flows project	1035000	-613223	-142873	-278904
NPV = Sum of discounted cash flows
NPV Incremental CF =	-5.22123E-08
Where
Discounting factor =	(1 + IRR)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
IRR=	7.14%