Hello, I need help answering this question below. value: 0.50 points Problem 7-1

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Hello,

I need help answering this question below.

value: 0.50 points Problem 7-16 Comparing Investment Criteria Mario Brothers, a game manufacturer, has a new idea for an adventure game. It can market the game 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 12 percent. Year Board Game CD-ROM 0 950 640 650 160 - 2.200 1,500 1.250 550 a. What is the payback period for each project? (Do not round intermediate calculations and round your final answers to 2 decimal places (e.g., 32.16).) Payback period Board game CD-ROM rs years b. What is the NPV for each project? (Do not round intermediate calculations and round your final answers to 2 decimal places (e.g., 32.16).) NPV Board game CD-ROMM 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).) IRR Board game CD-ROM d. What is the incremental IRR? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).) Incremental IRR

Explanation / Answer

a)

Board game:

Cumulative cash flow for year 0 = -950

Cumulative cash flow for year 1 = -950 + 640 = -310

Cumulative cash flow for year 2 = -310 + 650 = 340

310 / 650 = 0.48

Payback periods = 1 + 0.48 = 1.48 years

CD-ROM

Cumulative cash flow for year 0 = -2,200

Cumulative cash flow for year 1 = -2,200 + 1500 = -700

Cumulative cash flow for year 2 = -700 + 1,250 = 550

700 / 1,250 = 0.56

Payback periods = 1 + 0.56 = 1.48 years

b)

NPV = Present value of cash inflows - present value of cash outflows

Board game:

NPV = -950 + 640 / ( 1 + 0.12)1 + 650 / ( 1 + 0.12)2 + 160 / ( 1 + 0.12)3

NPV = $253.49

CD - ROM:

NPV = -2,200 + 1,500 / ( 1 + 0.12)1 + 1,250 / ( 1 + 0.12)2 + 550 / ( 1 + 0.12)3

NPV = $527.26

C)

IRR is the rate of return that makes NPV equal to 0

Board game:

NPV = -950 + 640 / ( 1 + R)1 + 650 / ( 1 + R)2 + 160 / ( 1 + R)3

Using trial and error method, i.e, after trying various values for R, let's try R as 29.98%

NPV = -950 + 640 / ( 1 + 0.2998)1 + 650 / ( 1 + 0.2998)2 + 160 / ( 1 + 0.2998)3

NPV = 0

Therefore, IRR is 29.98%

CD - ROM:

NPV = -2,200 + 1,500 / ( 1 + R)1 + 1,250 / ( 1 + R)2 + 550 / ( 1 + R)3

Using trial and error method, i.e, after trying various values for R, let's try R as 27.89%

NPV = -950 + 640 / ( 1 + 0.2789)1 + 650 / ( 1 + 0.2789)2 + 160 / ( 1 + 0.2789)3

NPV = 0

Therefore, IRR is 27.89%

d)

Year 0 incremental cash flow = 2,200 - 950 = 1,250

Year 1 incremental cash flow = 1,500 - 640 = 860

Year 2 incremental cash flow = 1,250 - 650 = 600

Year 3 incremental cash flow = 550 - 160 = 390

NPV = -1,250 + 860 / ( 1 + R)1 + 600 / ( 1 + R)2 + 390 / ( 1 + R)3

Using trial and error method, i.e, after trying various values for R, let's try R as 26.34%

NPV = -950 + 640 / ( 1 + 0.2634)1 + 650 / ( 1 + 0.2634)2 + 160 / ( 1 + 0.2634)3

NPV = 0

Therefore, incremental IRR is 26.34%

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