Question

Consider two mutually exclusive new product launch projects that Nagano Golf is considering. The NX-20 project is a proposed high-end amateur clubs that requires an initial investment of $420,000 at Time 0. Cash flow at year 1 is $120,000. In each subsequent year cash flow will grow at 10 percent per year. The introduction of a new product at year 6 will terminate further cash flows from this project. (See financial data below). Assume a discount rate for both products is 15% where necessary to solve the following problems.

Year	NP-30	NX-20
0	-$660,000	-$420,000
1	$222,000	$120,000
2	$222,000	$132,000
3	$222,000	$145,000
4	$222,000	$199,720
5	$222,000	$206,692

calculate the IRR for both projects. NP-30 is the next generation of professional clubs that will take an initial investment of $660,000 at Time 0. The next next five years (year 1-5) of sales will generate a consistent cash flow of $222,000 per year. (see financial data in Question 4). The introduction of the new clubs (the next, next generation) at Year 6 will terminate further cash flows from this project.

Based only on IRR considerations, which project should be selected? Use excel to help with your calculations. Round to the the second decimal, e.g 24.05%, 18.29%, etc.

Answer 1

IRR = Where NPV of project is equal to zero

Using trial and error approch we get

IRR = 20 % + (3915.895 - 0) / [ 3915.895 - (-10431.48)]

= 20 + 0.2729

= 20.27%

Using trial and error approch we get

IRR = 23 % + (3405.714 - 0) / [ 3405.714 - (-6346.551)]

= 23 + 0.3492

= 23.35%

Both project had IRR greater than the cost of capital of 15%, we would select Both the projects

Based upon the IRR, we would select the project NX-20 out of both project as NX-20 has higher IRR than project NX -30.