Question

Consider the following cash flows of two mutually exclusive projects for Tokyo Rubber Company. Assume the discount rate for both projects is 11 percent. |

Year | Dry Prepreg | Solvent Prepreg | ||||

0 | –$ | 1,740,000 | –$ | 770,000 | ||

1 | 1,104,000 | 395,000 | ||||

2 | 908,000 | 640,000 | ||||

3 | 754,000 | 398,000 | ||||

a. |
What is the payback period for both projects? |

b. |
What is the NPV for both projects? |

c. |
What is the IRR for both projects? |

d. |
Calculate the incremental IRR for the cash flows. |

Answer #1

Dry:

Payback=1+(1740000-1104000)/908000=1.700440529

Solvent:

Payback=1+(770000-395000)/640000=1.5859375

Dry:

NPV=-1740000+1104000/1.11+908000/1.11^2+754000/1.11^3=542866.0655

Solvent:

NPV=-770000+395000/1.11+640000/1.11^2+398000/1.11^3=396308.3829

Dry:

IRR:

0=-1740000+1104000/(1+IRR)+908000/(1+IRR)^2+754000/(1+IRR)^3

=>IRR=29.549%

Solvent:

IRR:

0=-770000+395000/(1+IRR)+640000/(1+IRR)^2+398000/(1+IRR)^3

=>IRR=38.367%

Incremental IRR:

0=-1740000+1104000/(1+IRR)+908000/(1+IRR)^2+754000/(1+IRR)^3-(-770000+395000/(1+IRR)+640000/(1+IRR)^2+398000/(1+IRR)^3)

=>IRR=20.996%

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