Question

Consider two mutually exclusive new product launch projects that Nagano Golf is considering. Assume the discount rate for both products is 16 percent. Project A: Nagano NP-30. Professional clubs that will take an initial investment of $740,000 at Year 0. For each of the next 5 years, (Years 1-5), sales will generate a consistent cash flow of $340,000 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 $970,000 at Year 0. Cash flow at Year 1 is $290,000. In each subsequent year, cash flow will grow at 10 percent per year. Introduction of new product at Year 6 will terminate further cash flows from this project. Year NP-30 NX-20 0 –$ 740,000 –$ 970,000 1 340,000 290,000 2 340,000 319,000 3 340,000 350,900 4 340,000 385,990 5 340,000 424,589 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.)

Answer 1

Sol: The table below shows the NPV and IRR of both the projects:

Year	NP 30 Cash Flows	NX 20 Cash Flows	DF @ 16%	PV NP 30	PV NX 20
0	-$7,40,000.00	-$9,70,000.00	1.000	-$7,40,000.000	-$9,70,000.000
1	$3,40,000.00	$2,90,000.00	0.862	$2,93,103.448	$2,50,000.000
2	$3,40,000.00	$3,19,000.00	0.743	$2,52,675.386	$2,37,068.966
3	$3,40,000.00	$3,50,900.00	0.641	$2,17,823.609	$2,24,806.778
4	$3,40,000.00	$3,85,990.00	0.552	$1,87,778.973	$2,13,178.841
5	$3,40,000.00	$4,24,589.00	0.476	$1,61,878.425	$2,02,152.349
NPV of Both Projects				$3,73,259.842	$1,57,206.933
IRR of Both Projects				17.34%	22.30%