Question

18. Comparing Inve 1. Comparing Investment Criteria Consider the following cash flows of two mutually! exclusive projects for Tokyo Rubber Company. JCCS for Tokyo Rubber Company. Assume the discount rate for both proi ects is 8 percent. Year Dry Prepreg Solvent Prepreg -$1,500,000 900,000 700,000 725,000 -$650,000 345,000 570,000 360,000 a. Based on the payback period, which project should be taken? b. Based on the NPV, which project should be taken? c. Based on the IRR, which project should be taken?! d. Based on this analysis, is incremental IRR analysis necessary? If yes, please conduct the analysis.

Answer 1

		Present Value(PV) of Cash Flow:
		(Cash Flow)/((1+i)^N)
		i=discount rate =8%=0.08
		N=Year   of Cash Flow
		CASH FLOW ANALYSIS OF Dry Prepreg
		N	CF		PV=CF/(1`.08^N)
		Year	Cash Flow	Cumulative Cash Flow	Present Value of Cash Flow
		0	-$1,500,000	-$1,500,000	-$1,500,000
		1	$900,000	-$600,000	$833,333
		2	$700,000	$100,000	$600,137
		3	$725,000	$825,000	$575,528
				SUM	$508,999
		Payback Period=Period at which cumulative cash flow=0
		Payback Period=1+(600000/700000)	1.86	Years
		NPV=Net Present Value=Sum of PVs=	$508,999
		IRR=Internal Rate of Return	26.84%	(Using IRR function of excel over cash flow)
		CASH FLOW ANALYSIS OF Solvent Prepreg
		N	CF		PV=CF/(1`.08^N)
		Year	Cash Flow	Cumulative Cash Flow	Present Value of Cash Flow
		0	-$650,000	-$650,000	-$650,000
		1	$345,000	-$305,000	$319,444
		2	$570,000	$265,000	$488,683
		3	$360,000	$625,000	$285,780
				SUM	$443,907
		Payback Period=1+(305000/570000)	1.54	Years
		NPV=Net Present Value=Sum of PVs=	$443,907
		IRR=Internal Rate of Return	42.16%	(Using IRR function of excel over cash flow)
			Dry Prepreg	Solvent Prepreg	Selected
	a	Payback	1.86	1.54	Solvent Prepreg
	b	NPV	$508,999	$443,907	Dry Prepreg
	c	IRR	26.84%	42.16%	Solvent Prepreg
	d	INCREMENTAL IRR ANALYSIS:
			A	B	C=A-B
			Cash Flow	Cashflow	Incremental
		Year	Dry Prepreg	Solvent Prepreg	cash flow
		0	-$1,500,000	-$650,000	-$850,000
		1	$900,000	$345,000	$555,000
		2	$700,000	$570,000	$130,000
		3	$725,000	$360,000	$365,000
		Internal Rate of Return (IRR)	12.68%	(Using IRR function of excel over incremental cash flow)
		Incremental IRR is greater than 8%
		Dry Prepeg should be selected
			119 X V for =IRR(111:114) H K L N=Year of Cash Flow CF oncolo=S9 2008 CASH FLOW ANALYSIS OF Dry Prepreg PV=CF/(1.08^N) Cumulative Present Value Year Cash Flow Cash Flow of Cash Flow O $1,500,000 $1,500,000 $1,500,000 1 $900,000 $600,000 $833,333 2 $700,000 $100,000 $600,137 3 $725,000 $825,000 $575,528 SUM $508,999 Payback Period=Period at which cumulative cash flow=0 Payback Period=1+(600000/700000) 1.86 Years NPV=Net Present Value=Sum of PVs= $508,999 IRR=Internal Rate of Return 26.84%! (Using IRR function of excel over cash flow) - X fac =IRR(125:128) A B C D E F G к M [ Payback Period=Period at which cumulative cash flow=0 Payback Period=1+(600000/700000) 1.86 Years NPV=Net Present Value=Sum of PVs= $508,999 IRR=Internal Rate of Return 26.84% (Using IRR function of excel over cash flow) CASH FLOW ANALYSIS OF Solvent Prepreg CF Year PV=CF/(1.084N) Cumulative Present Value Cash Flow Cash Flow of Cash Flow 0 $650,000 $ 650,000 $650,000 1 $345,000 $305,000 $319,444 2 $570,000 $265,000 $488,683 3 $360,000 $625,000 $285,780 SUM $443,907 1.54 Years $443,907 42.16%! (Using IRR function of excel over cash flow) Payback Period=1+(305000/570000) NPV=Net Present Value=Sum of PVs= IRR=Internal Rate of Return 148 =IRR(K43:546) A B C D E F G H L M N NPV I $508,999 26.84% J K $443,907 Dry Prepreg 42.16% Solvent Prepreg IRR INCREMENTAL IRR ANALYSIS: Year A C=A-B Cash Flow Cashflow Incremental Dry Prepreg Solvent Prepreg cash flow 0 $1,500,000 $650,000 $850,000 1 $900,000 $345,000 $555,000 2 $700,000 $570,000 $130,000 3 $725,000 $360,000 $365,000 Internal Rate of Return (IRR) 12.68%! (Using IRR function of excel over incremental cash flow) 49