Question

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?

Answer 1

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)

Note: Give it a thumbs up if it helps! Thanks in advance!