Question

Mario Brothers, a game manufacturer, has a new idea for an adventure game. It can either market the game as a traditional board game or as an interactive DVD, but not both. Consider the following cash flows of the two mutually exclusive projects. Assume the discount rate for both projects is 12 percent.

Year	Board Game			DVD
0	–$	1,450		–$	3,200
1		740			2,000
2		1,200			1,620
3		260			1,050

a. 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.)

	Payback period
Board game	years
DVD	years

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

	NPV
Board game	$
DVD	$

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

	IRR
Board game	%
DVD	%

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

Incremental IRR             %

Answer 1

1.
PAYBACK:
Board Game=1+(1450-740)/1200=1.591666667

DVD=1+(3200-2000)/1620=1.740740741

2.
NPV:
Board Game=-1450+740/1.12+1200/1.12^2+260/1.12^3=352.4098032

DVD=-3200+2000/1.12+1620/1.12^2+1050/1.12^3=624.5376276

3.
IRR:
Board Game:
-1450+740/(1+IRR)+1200/(1+IRR)^2+260/(1+IRR)^3=0
=>IRR=27.19%

DVD:
-3200+2000/(1+IRR)+1620/(1+IRR)^2+1050/(1+IRR)^3=0
=>IRR=24.40%

4.
Incremental IRR:
-1450+740/(1+IRR)+1200/(1+IRR)^2+260/(1+IRR)^3-(-3200+2000/(1+IRR)+1620/(1+IRR)^2+1050/(1+IRR)^3)=0
=>IRR=22.00%