Comparing Investment Criteria Mario Brothers, a game manufacturer, has a new ide

Question

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 DVD, 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 10 % Year 0 is -$750 on Board Game and -$1,800 on DVD. Year 1 is $600 on Board Game and $1,300 on DVD. Year2 is $450 on Board Game and $850 on DVD. Year3 is $120 on Board Game and $350 on DVD. a. Based on the payback period rule, which project should be chosen? b. Based on the NPV, which project should be chosen? c. Based on the IRR, which project should be chosen? d. Based on the incremental IRR, which project should be chosen?

Explanation / Answer

a.PAyback for project 1= 1.33 years

Payback for project 2= 1.588 years

Therefore project 1 must be chsen.

b. NPV of project1= $257.513

NPV of project 2= $347.257

Therefore project 2 must be chosen.

c. IRR of project1= 33.79%

IRR of project2=23.31%

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