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

Year Board Game DVD
0 -$1,200 -$2,700
1 690 1,750
2 950 1,570
3 210 800

Required:
a. What is the payback period for each project?
b. What is the NPV for each project?
c. What is the IRR for each project?
d. What is the incremental IRR?

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Parrain Parrain · Answer 1 · 2021-07-09T03:37:11+02:00

Answer:

a. Payback period:

Board game:

= Year before payback + Amount left / Cashflow in year of payback

= 1 + (1,200 - 690) / 950

= 1.54 years

Game DVD:

= 1 + (2,700 - 1,750) / 1,570

= 1.61 years

b. NPV

Board Game

= 690 / 1.12 + 950 / 1.12² + 210 / 1.12³ - 1,200

= $322.88

Game DVD

= 1,750 / 1.12 + 1,570 / 1.12² + 800 / 1.12³ - 2,700

= $683.52

c. IRR

Look at attached picture

Board Game IRR = 29%

Game DVD IRR = 28%

d. Incremental IRR

Look at attached picture

= 27%

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