Consider the following cash flows of two mutually exclusive projects for Tokyo R

Question

Consider the following cash flows of two mutually exclusive projects for Tokyo Rubber Company. Assume the discount rate for Tokyo Rubber Company is 12 percent. YEAR Dry Prepreg                  Solvent Prepreg

0 –$ 1,800,000                         –$ 800,000

1      1,110,000                            425,000

2      920,000                              700,000

3     760,000                              410,000

A)What is the payback period for both projects?____YRS   ____YRS

B)What is the NPV for both projects? (Do not round intermediate calculations. Round your answers to 2 decimal places. (e.g., 32.16)$___   $ ___

C)What is the IRR for both projects? (Do not round intermediate calculations. Round your answers to 2 decimal places. (e.g., 32.16))

D)Calculate the incremental IRR for the cash flows. (Do not round intermediate calculations. Round your answer to 2 decimal places. (e.g., 32.16))

Explanation / Answer

A) payback period of DRY Prepreg= Initial Investment/cash inflows =1800000/1110000+(920000)=1.75 years

i.e frist cash flow is $ 110000 and to equalise with cash outflow with inflow the remaing balance (1800000-1110000)

( $ 690000 has to be adjusted from the second year cash flow.In the second year the project earns 1110000

for 12 months if it earns 1110000 ,how much to the project takes to earn $ 690000 =690000/1110000*12=0.75 years)

For SOLVENT PREPREG==800000/425000+(700000) =1.53 years

B) NPV of DRY=$ 465590 SOLVENT =$ 429345( DRY-1800000+(0.893*1110000+0.797*920000+0.712*760000

SOLVENT=(-800000+.893*425000+.797*700000+.712*410000)

C) IRR =27.63% DRY 40.98% SOLVENT

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