Question

Consider two mutually exclusive new product launch projects that Nagano Golf is considering. Assume the discount...

Consider two mutually exclusive new product launch projects that Nagano Golf is considering. Assume the discount rate for both projects is 13 percent.

Project A: Nagano NP-30. Professional clubs that will take an initial investment of \$1,000,000 at Time 0. Introduction of new product at Year 6 will terminate further cash flows from this project.

Project B: Nagano NX-20. High-end amateur clubs that will take an initial investment of \$736,000 at Time 0. Introduction of new product at Year 6 will terminate further cash flows from this project.

Year     NP-30                 NX-20

0        –\$ 1,000,000         –\$736,000

1           355,000             271,000

2           345,000             284,000

3           320,000             269,000

4           320,000             255,000

5           230,000             196,000

Complete the following table:

 NP-30 NX-20 NPV \$ \$ IRR % % PI

What is the incremental IRR of investing in the larger project

What is the required return?

 Year NP-30 NX-20 Rate 0 -1000000 -736000 0.13 1 355000 271000 2 345000 284000 3 320000 269000 4 320000 255000 5 230000 196000 NPV \$127,217.73 \$175,444.38 =NPV(0.13,Cash Flows from Year 1-5)-1000000 =NPV(0.13,Cash Flows from Year 1-5)-736000 IRR 18.42% 22.84% =IRR(Cash Flows from Year 0-5) =IRR(Cash Flows from Year 0-5) PI 1.127 1.238 =1+127217.73/1000000 =1+175444.38/736000
 Year NP-30 NX-20 (NP-30)-(NX-20) 0 -1000000 -736000 -264000 1 355000 271000 84000 2 345000 284000 61000 3 320000 269000 51000 4 320000 255000 65000 5 230000 196000 34000 Incremental IRR 4.30% =IRR(Cash Flows from Year 0-5)

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