Question

Mario Brothers, a game manufacturer, has a new idea for an adventure game. It can either market the game as a traditional board game or as an interactive DVD, but not both. Consider the following cash flows of the two mutually exclusive projects. Assume the discount rate for both projects is 10 percent.

Year Board Game DVD

0 –$ 1,600 –$ 3,500

1 770 2,150

2 1,350 1,650

3 290 1,200

What is the incremental IRR?

Answer 1

For Incremental IRR, we will subtract 2 cashflows and then find IRR of the difference cashflows

A C 23 Discount rate 10% DVD DVD Board Game Board Game 24 Year -$1,600 $770 -$3,500 C25- B25 $2,150 25 $1,380 26 1

X V fx IRR(D25:D28) SUM A B 23 Discount rate 10% DVD Board Game Board Game DVD 24 Year -$3,500 $2,150 $1,650 $1,200 IRR -$1,600 -$1,900 $1,380 25 0 $770 26 1 $1,350 $300 27 2 $910 $290 28 =IRR(D25:D28 29

X V fx NPV(B23,D26:D29)+D25 SUM А В E 23 Discount rate 10% DVD Board Game DVD Board Game 24 Year -$1,600 -$3,500 $2,150 $1,650 $1,200 -$1,900 $1,380 25 0 $770 26 1 $1,350 $300 27 2 $290 $910 28 3 IRR 19% 29 NPV NPV(B23, D26: D29 )+ D25 30 31

fx =IRR(D25:D28) D29 В E 23 Discount rate 10% DVD Board Game Board Game 24 Year DVD -$1,900 $1,380 -$3,500 $2,150 $1,650 $1,200 -$1,600 25 0 $770 26 $1,350 $300 27 2 $290 $910 28 3 19%--Invremental IRR IRR 29 $286.31 30 NPV 31 32 LL

Since, Incremental IRR > WACC, we should accept DVD project