Wii Brothers, a game manufacturer, has a new idea for an adventure game. It can

Question

Wii 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 the company. Assume the discount rate is 10 percent.

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.)

What is the NPV for each project? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

What is the IRR for each project? (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

What is the incremental IRR? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Wii 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 the company. Assume the discount rate is 10 percent.

Explanation / Answer

A. Payback period is obtained by counting the number of years it will take to recover the cash invested in a project.

Payback period = Cost of the investment/ Annual net cash flow

Board game-

Cumulative Cash flows Yr 1 = $620

Cumulative cash flows yr 2 = $620 + $550 =$1170

Payback period = 1 + (850-620) / $550 =1.42 years

DVD-

Cumulative cash flows yr 1 = $1400

Cumulative cash flows yr 2 = $1400 + $1050 =$2450

Payback period= 1+ (2000 - 1400) / 1050 = 1.57 years

The board game has a shorter payback period than the DVD project, hence the board game must be accepted.

B. Net Present value is the sum of the present value of the cash flows from the project.

NPV = CF1/(1+r) + CF2/(1+r)^2 - CF0

Board game -

NPV = -850 + 620/(1.10) + 550/(1.10)^2 + 140/(1.10)^3 = $454.54

DVD

NPV = -2000 + 1400/1.10 + 1050/(1.10)^2 + 450/(1.10)^3 = $478.57

Since the NPV of the DVD is greater than the NPV of the board game, CHOOSE DVD.

C. The IRR is the intrest rate that makes the NPV of a project equal to zero. So the IRR of each project is zero.

Board game -

0 = -850 + $620/(1+IRR) + $550/(1+IRR)^2 + 140 /(1+IRR)^3

Using spreadsheet and financial calculator we get IRR = 34%

DVD-

0= -2000 + $1400/(1+IRR) + $1050/(1+IRR)^2 + $450/(1+IRR)^3

We get IRR = 24%

Board game has higher IRR than DVD, SO choose board game.

Related Questions

Navigate

• Browse (All)
• Browse W
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.