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

a. What is the payback period for each project? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) Payback period Board game years DVD years

b. What is the NPV for each project? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) NPV Board game $ DVD $

c. What is the IRR for each project? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) IRR Board game % DVD %

d. What is the incremental IRR? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Incremental IRR %

Answer 1

D YEAR Board game cash flows cumulative cash flows -$1,600.00 $1,600.00 $770.00 $830.00 $1,350.00 $520.00 $290.00 $810.00 26.30% NPV IRR(B3:36) payback: pv @ 10% 1.0000 0.9091 0.8264 0.7513 discounted cash flows -$1,600.00 $700.00 $1,115.70 $217.88 $433.58 2 years 1.61 1+(830/1350) YEAR cash flows -$3,500.00 $2,150.00 $1,650.00 $1,200.00 22.65% IRR(B13:B16) DVD cumulative cash flows -$3,500.00 -$1,350.00 $300.00 $1,500.00 NPV pv @ 10% 1.0000 0.9091 0.8264 0.7513 discounted cash flows -$3,500.00 $1,954.55 $1,363.64 $901.58 $719.76 3 payback: 1.82 years 1+(1350/1650)

Board game DVD 1.61 1.82 b) Board game DVD $433.58 $719.76 Board game 26.30% 22.65% DVD

Difference in cash flows Board game Cash flows $1,600 $770 $1,350 $290 Incremental IRR DVD Cash flows $3,500 $2,150 $1,650 $1,500 $1,900 -$1,380 $300 $1,210 25.58% IRR(D3:D6)