Question

Comparing Investment Criteria Consider two mutually exclusive new product launch projects that Nagano Golf is considering. Assume the discount rate for both products is 15 percent. Project A: Nagano NP-30. Professional clubs that will take an initial investment of $735,000 at Year 0. For each of the next 5 years (Years 1-5), sales will generate a consistent cash flow of $239,000 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 $460,000 at Year 0. Cash flow at Year 1 is $130,000. 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.

Answer 1

	NP - 30	NX-20	IMPLICATIONS
PAYBACK	3.0753 YEARS	3 + (29700 / 173,030) = 3.171646 YEARS	payback period is more in NX-20 than NP - 30 , NP-30 is able to recover initial investment quicker than NX-20.
IRR	18.7422 %	19.8710 %	IRR OF NP-30 < IRR OF NX -20 , According to this we should accept NX -20 but  we will follow NPVs .
PI	1.090020	1.126433	according to PI calculation NX-20 is more attractive .
NPV	66,165.068	58,158.9296	NPV OF NP-30 > NPV OF NX -20 , we will follow the calculations of NPV and accept  NP-30 as it has a higher NPV and NPV is the best method of making such a decision as it is better suited .