Consider the following cash flows of two mutually exclusive projects for Spartan

Question

Consider the following cash flows of two mutually exclusive projects for Spartan Rubber Company. Assume the discount rate for both projects is 7 percent.

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.)

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.)

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.)

d. Calculate the incremental IRR for the cash flows. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Incremental IRR             %

Year Dry Prepreg Solvent Prepreg 0 –$ 1,890,000 –$ 900,000 1 1,119,000 470,000 2 938,000 790,000 3 769,000 428,000

Explanation / Answer

Pay Back Period = years full recovery + unrecovered cost at beginning of last year
                                                 cash flow in following year

Dry Prepreg

Pay Back Period = 1 + (771000 / 938000)

                           = 1.82 years.

NPV = (1119000 * 0.9345) + ( 938000 * 0.8734) + ( 769000 * 0.8163) - 1890000

     = 1045705.5 + 819249.2 + 627734.7 – 1890000

    = 602689.40

IRR should be such that Outflow = Inflow and NPV = 0.

So, the IRR is =~ 25 %

Solvent Prepreg

Pay Back Period = 1 + (430000 / 790000)

                           = 1.54 years.

NPV = (470000 * 0.9345) + ( 790000 * 0.8734) + ( 428000 * 0.8163) - 900000

     = 439215 + 689986 + 349376.4 – 900000

    = 578577.40

IRR should be such that Outflow = Inflow and NPV = 0.

So, the IRR is =~ 39.50 %

Pay Back Period = years full recovery + unrecovered cost at beginning of last year
                                                 cash flow in following year

Dry Prepreg

Pay Back Period = 1 + (771000 / 938000)

                           = 1.82 years.

NPV = (1119000 * 0.9345) + ( 938000 * 0.8734) + ( 769000 * 0.8163) - 1890000

     = 1045705.5 + 819249.2 + 627734.7 – 1890000

    = 602689.40

IRR should be such that Outflow = Inflow and NPV = 0.

So, the IRR is =~ 25 %

Solvent Prepreg

Pay Back Period = 1 + (430000 / 790000)

                           = 1.54 years.

NPV = (470000 * 0.9345) + ( 790000 * 0.8734) + ( 428000 * 0.8163) - 900000

     = 439215 + 689986 + 349376.4 – 900000

    = 578577.40

IRR should be such that Outflow = Inflow and NPV = 0.

So, the IRR is =~ 39.50 %

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