Problem 5-14 Comparing Investment Criteria Mario Brothers, a game manufacturer,
ID: 2632645 • Letter: P
Question
Problem 5-14 Comparing Investment Criteria Mario Brothers, a game manufacturer, has a new idea for an adventure game. It can market the game either as a traditional board game or as an interactive CD-ROM, but not both. Consider the following cash flows of the two mutually exclusive projects for Mario Brothers. Assume the discount rate for Mario Brothers is 19 percent.
Calculate the payback period rule.
Board game
CR ROM
Which project should be chosen according to the payback period? CD Rom or board game?
Calculate the NPV for CD ROM and board game
Year Board Game CD-ROM 0 $ -510 $ -1,990 1 790 1,310 2 60 990 3 140 380 (a)Calculate the payback period rule.
Board game
CR ROM
(b)Which project should be chosen according to the payback period? CD Rom or board game?
Requirement 2: (a)Calculate the NPV for CD ROM and board game
Explanation / Answer
a)
pay back period of board game
= 510/790 = 0.65 years
pay back period of CD rom
= 1 + 680/990 = 1.69 years
hence choose board game
b)
NPV of board game
= -510 + 790/1.19 + 60/1.19^2 + 140/1.19^3
= 279.31
NPV og CDROM
= -1990 + 1310/1.19 + 990/1.19^2 + 380/1.19^3
= 35.44
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