Consider two mutually exclusive new product launch projects that Nagano Golf is considering. Assume the discount rate for both products is 12 percent. |
Project A: | Nagano NP-30. |
Professional clubs that will take an initial investment of $700,000 at Time 0. | |
Next five years (Years 1–5) of sales will generate a consistent cash flow of $300,000 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 $850,000 at Time 0. | |
Cash flow at Year 1 is $250,000. In each subsequent year cash flow will grow at 10 percent per year. |
|
Introduction of new product at Year 6 will terminate further cash flows from this project. |
Year | NP-30 | NX-20 | ||||
0 | –$ | 700,000 | –$ | 850,000 | ||
1 | 300,000 | 250,000 | ||||
2 | 300,000 | 275,000 | ||||
3 | 300,000 | 302,500 | ||||
4 | 300,000 | 332,750 | ||||
5 | 300,000 | 366,025 | ||||
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.) |
NP-30 | NX-20 | ||||||
Payback | years | years | |||||
IRR | % | % | |||||
PI | |||||||
NPV | $ | $ | |||||
NP-30 | ||||||
Year | Cash flow stream | Cumulative cash flow | ||||
0 | -700000 | -700000 | ||||
1 | 300000 | -400000 | ||||
2 | 300000 | -100000 | ||||
3 | 300000 | 200000 | ||||
4 | 300000 | 500000 | ||||
5 | 300000 | 800000 | ||||
Payback period is the time by which undiscounted cashflow cover the intial investment outlay | ||||||
this is happening between year 2 and 3 | ||||||
therefore by interpolation payback period = 2 + (0-(-100000))/(200000-(-100000)) | ||||||
2.33 Years | ||||||
NX-20 | ||||||
Year | Cash flow stream | Cumulative cash flow | ||||
0 | -850000 | -850000 | ||||
1 | 250000 | -600000 | ||||
2 | 275000 | -325000 | ||||
3 | 302500 | -22500 | ||||
4 | 332750 | 310250 | ||||
5 | 366025 | 676275 | ||||
Payback period is the time by which undiscounted cashflow cover the intial investment outlay | ||||||
this is happening between year 3 and 4 | ||||||
therefore by interpolation payback period = 3 + (0-(-22500))/(310250-(-22500)) | ||||||
3.07 Years | ||||||
NP-30 | ||||||
IRR is the rate at which NPV =0 | ||||||
IRR | 0.322725326 | |||||
Year | 0 | 1 | 2 | 3 | 4 | 5 |
Cash flow stream | -700000 | 300000 | 300000 | 300000 | 300000 | 300000 |
Discounting factor | 1 | 1.322725 | 1.749602 | 2.314243 | 3.0611082 | 4.049005 |
Discounted cash flows project | -700000 | 226804.5 | 171467.5 | 129632 | 98003.724 | 74092.27 |
NPV = Sum of discounted cash flows | ||||||
NPV NP-30 = | 0.000655393 | |||||
Where | ||||||
Discounting factor = | (1 + IRR)^(Corresponding period in years) | |||||
Discounted Cashflow= | Cash flow stream/discounting factor | |||||
IRR= | 32.27% | |||||
NX-20 | ||||||
IRR is the rate at which NPV =0 | ||||||
IRR | 0.21583157 | |||||
Year | 0 | 1 | 2 | 3 | 4 | 5 |
Cash flow stream | -850000 | 250000 | 275000 | 302500 | 332750 | 366025 |
Discounting factor | 1 | 1.215832 | 1.478246 | 1.797299 | 2.1852124 | 2.65685 |
Discounted cash flows project | -850000 | 205620.6 | 186031.2 | 168308.1 | 152273.52 | 137766.5 |
NPV = Sum of discounted cash flows | ||||||
NPV NX-20 = | 1.2407E-07 | |||||
Where | ||||||
Discounting factor = | (1 + IRR)^(Corresponding period in years) | |||||
Discounted Cashflow= | Cash flow stream/discounting factor | |||||
IRR= | 21.58% | |||||
NP-30 | ||||||
Discount rate | 0.12 | |||||
Year | 0 | 1 | 2 | 3 | 4 | 5 |
Cash flow stream | -700000 | 300000 | 300000 | 300000 | 300000 | 300000 |
Discounting factor | 1 | 1.12 | 1.2544 | 1.404928 | 1.5735194 | 1.762342 |
Discounted cash flows project | -700000 | 267857.1 | 239158.2 | 213534.1 | 190655.42 | 170228.1 |
NPV = Sum of discounted cash flows | ||||||
NPV NP-30 = | 381432.86 | |||||
Where | ||||||
Discounting factor = | (1 + discount rate)^(Corresponding period in years) | |||||
Discounted Cashflow= | Cash flow stream/discounting factor | |||||
NX-20 | ||||||
Discount rate | 0.12 | |||||
Year | 0 | 1 | 2 | 3 | 4 | 5 |
Cash flow stream | -850000 | 250000 | 275000 | 302500 | 332750 | 366025 |
Discounting factor | 1 | 1.12 | 1.2544 | 1.404928 | 1.5735194 | 1.762342 |
Discounted cash flows project | -850000 | 223214.3 | 219228.3 | 215313.5 | 211468.64 | 207692.4 |
NPV = Sum of discounted cash flows | ||||||
NPV NX-20 = | 226917.18 | |||||
Where | ||||||
Discounting factor = | (1 + discount rate)^(Corresponding period in years) | |||||
Discounted Cashflow= | Cash flow stream/discounting factor | |||||
NP-30 | ||||||
PI= (NPV+initial inv.)/initial inv. | ||||||
=(381432.86+700000)/700000 | ||||||
1.54 | ||||||
NX-20 | ||||||
PI= (NPV+initial inv.)/initial inv. | ||||||
=(226917.18+850000)/850000 | ||||||
1.27 | ||||||
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