Question

Consider two mutually exclusive new product launch projects that Nagano Golf is considering. Assume the discount rate for both products is 12 percent.

  

Project A:	Nagano NP-30.
	Professional clubs that will take an initial investment of $700,000 at Time 0.
	Next five years (Years 1–5) of sales will generate a consistent cash flow of $300,000 per year.
	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 $850,000 at Time 0.
	Cash flow at Year 1 is $250,000. In each subsequent year cash flow will grow at 10 percent per year.
	Introduction of new product at Year 6 will terminate further cash flows from this project.

  

Year	NP-30			NX-20
0	–$	700,000		–$	850,000
1		300,000			250,000
2		300,000			275,000
3		300,000			302,500
4		300,000			332,750
5		300,000			366,025

  

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

  

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

Answer 1

NP-30
Year	Cash flow stream	Cumulative cash flow
0	-700000	-700000
1	300000	-400000
2	300000	-100000
3	300000	200000
4	300000	500000
5	300000	800000
Payback period is the time by which undiscounted cashflow cover the intial investment outlay
this is happening between year 2 and 3
therefore by interpolation payback period = 2 + (0-(-100000))/(200000-(-100000))
2.33 Years
NX-20
Year	Cash flow stream	Cumulative cash flow
0	-850000	-850000
1	250000	-600000
2	275000	-325000
3	302500	-22500
4	332750	310250
5	366025	676275
Payback period is the time by which undiscounted cashflow cover the intial investment outlay
this is happening between year 3 and 4
therefore by interpolation payback period = 3 + (0-(-22500))/(310250-(-22500))
3.07 Years
NP-30
IRR is the rate at which NPV =0
IRR	0.322725326
Year	0	1	2	3	4	5
Cash flow stream	-700000	300000	300000	300000	300000	300000
Discounting factor	1	1.322725	1.749602	2.314243	3.0611082	4.049005
Discounted cash flows project	-700000	226804.5	171467.5	129632	98003.724	74092.27
NPV = Sum of discounted cash flows
NPV NP-30 =	0.000655393
Where
Discounting factor =	(1 + IRR)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
IRR=	32.27%
NX-20
IRR is the rate at which NPV =0
IRR	0.21583157
Year	0	1	2	3	4	5
Cash flow stream	-850000	250000	275000	302500	332750	366025
Discounting factor	1	1.215832	1.478246	1.797299	2.1852124	2.65685
Discounted cash flows project	-850000	205620.6	186031.2	168308.1	152273.52	137766.5
NPV = Sum of discounted cash flows
NPV NX-20 =	1.2407E-07
Where
Discounting factor =	(1 + IRR)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
IRR=	21.58%
NP-30
Discount rate	0.12
Year	0	1	2	3	4	5
Cash flow stream	-700000	300000	300000	300000	300000	300000
Discounting factor	1	1.12	1.2544	1.404928	1.5735194	1.762342
Discounted cash flows project	-700000	267857.1	239158.2	213534.1	190655.42	170228.1
NPV = Sum of discounted cash flows
NPV NP-30 =	381432.86
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
NX-20
Discount rate	0.12
Year	0	1	2	3	4	5
Cash flow stream	-850000	250000	275000	302500	332750	366025
Discounting factor	1	1.12	1.2544	1.404928	1.5735194	1.762342
Discounted cash flows project	-850000	223214.3	219228.3	215313.5	211468.64	207692.4
NPV = Sum of discounted cash flows
NPV NX-20 =	226917.18
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
NP-30
PI= (NPV+initial inv.)/initial inv.
=(381432.86+700000)/700000
1.54
NX-20
PI= (NPV+initial inv.)/initial inv.
=(226917.18+850000)/850000
1.27