Thompson Manufacturing is considering two investment proposals. The first involv

Question

Thompson Manufacturing is considering two investment proposals. The first involves a quality improvement project, and the second is about an advertising campaign. The cash flows associated with each project appear below:

Advertising Campaign

Suppose the hurdle rate of the firm is 10%. Calculate the cash inflows of the "incremental project" by subtracting the cash flows of the second project from the cash flows of the first project. What is the IRR of the incremental project?

Quality Improvement

Advertising Campaign

Intial cash inflow 100,000 100,000 Cash inflows Year 1 10,000 80,000 Year 2 30,000 45,000 Year 3 125,000 10,000

Explanation / Answer

Initial outflow = 100000 same

Incremental Cash inFlows :

year 1 : 10000- 80000 = -70000

Year 2 : 30000-45000 = -15000

Year 3: 125000-10000 = 115000

So,

Present Value of incremental Inflows are

-70000 * 0.909 + -15000*0.826 + 115000* 0.751 = $ 10345

Thanks

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