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? (Do not round intermediate calculations. Round your answers to 2 decimal places, e.g., 32.16.)

   

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 and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

   

d.	Calculate the incremental IRR for the cash flows. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

   

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%