Comparing Investment Criteria Consider the following cash flows of two mutually

Question

Comparing Investment Criteria Consider the following cash flows of two mutually exclusive projects for tokyo Rubber Company. Assume the discount rate for both projects is 8 percent.

a. Based on the payback period, which project should be taken?

b. Based on the NPV, which project should be taken?

c. Based on the IRR, which project should be taken?

d. Based on this analysis, is incremental IRR analysis necessary? If yes, please conduct the analysis.

Year Dry Prepreg 1700000 1100000 900000 750000 Solvent Prepreg 750000 375000 600000 390000

Explanation / Answer

Solution.

a. Based on the payback period,

PBP of Dry Prerpreg = 1 + 600,000 / 900,000 = 1.67 year

PBP of Solventy Prerpreg = 1 + 375,000 / 600,000 = 1.62 year

Solventy Prerpreg is acceptable.

b. Based on the NPV, which project should be taken?

Dry Prerpreg is acceptable.

c. Based on the IRR, which project should be taken?

Solventy Prerpreg is acceptable.

D. Based on this analysis, is incremental IRR analysis necessary? If yes, please conduct the analysis.

Comulative Year Dry Prerpreg Solvent Prepreg Dry Prerpreg Solvent Prepreg 0      (1,700,000.00)             (750,000.00) 1        1,100,000.00                375,000.00    1,100,000.00                375,000.00 2            900,000.00                600,000.00    2,000,000.00                975,000.00 3            750,000.00                390,000.00    2,750,000.00            1,365,000.00

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