Mario Brothers, a game manufacturer, has a new idea for an adventure game. It ca
ID: 2652082 • Letter: M
Question
Mario 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 Mario Brothers. Assume the discount rate for Mario Brothers is 9 percent.
What is the payback period for each project? (Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16))
What is the NPV for each project? (Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16))
What is the IRR for each project? (Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16))
What is the incremental IRR? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
Mario 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 Mario Brothers. Assume the discount rate for Mario Brothers is 9 percent.
Explanation / Answer
Answer:
a.
Calculation of Payback Period
Year
Board Game
DVD
Cash Flows
Accumulated Cash Flows
Cash Flows
Accumulated Cash Flows
0
$ (1,050.00)
$ (1,050.00)
$ (2,400.00)
$ (2,400.00)
1
$ 660.00
$ (390.00)
$ 1,600.00
$ (800.00)
2
$ 750.00
$ 360.00
$ 1,360.00
$ 560.00
3
$ 180.00
$ 540.00
$ 650.00
$ 1,210.00
Payback Period =
1 year + 390 /750 = 1.52 Years
1 year + 800 /1360 = 1.59 Years
b.
Calculation of NPV
Year
PVF
Board Game
DVD
9%
Cash Flows (CF)
PV = CF*PVF
Cash Flows (CF)
PV = CF*PVF
0
1.00000
$ (1,050.00)
$ (1,050.00)
$ (2,400.00)
$ (2,400.00)
1
0.91743
$ 660.00
$ 605.50
$ 1,600.00
$ 1,467.89
2
0.84168
$ 750.00
$ 631.26
$ 1,360.00
$ 1,144.68
3
0.77218
$ 180.00
$ 138.99
$ 650.00
$ 501.92
NPV = Sum 0f PVs
$ 325.76
$ 714.49
c.
Calculation of IRR
Year
Board Game
DVD
Cash Flows
Cash Flows
0
$ (1,050.00)
$ (2,400.00)
1
$ 660.00
$ 1,600.00
2
$ 750.00
$ 1,360.00
3
$ 180.00
$ 650.00
IRR =
28.70%
27.67%
d.
Incremental IRR =
1.04%
(28.7 -27.67)
a.
Calculation of Payback Period
Year
Board Game
DVD
Cash Flows
Accumulated Cash Flows
Cash Flows
Accumulated Cash Flows
0
$ (1,050.00)
$ (1,050.00)
$ (2,400.00)
$ (2,400.00)
1
$ 660.00
$ (390.00)
$ 1,600.00
$ (800.00)
2
$ 750.00
$ 360.00
$ 1,360.00
$ 560.00
3
$ 180.00
$ 540.00
$ 650.00
$ 1,210.00
Payback Period =
1 year + 390 /750 = 1.52 Years
1 year + 800 /1360 = 1.59 Years
b.
Calculation of NPV
Year
PVF
Board Game
DVD
9%
Cash Flows (CF)
PV = CF*PVF
Cash Flows (CF)
PV = CF*PVF
0
1.00000
$ (1,050.00)
$ (1,050.00)
$ (2,400.00)
$ (2,400.00)
1
0.91743
$ 660.00
$ 605.50
$ 1,600.00
$ 1,467.89
2
0.84168
$ 750.00
$ 631.26
$ 1,360.00
$ 1,144.68
3
0.77218
$ 180.00
$ 138.99
$ 650.00
$ 501.92
NPV = Sum 0f PVs
$ 325.76
$ 714.49
c.
Calculation of IRR
Year
Board Game
DVD
Cash Flows
Cash Flows
0
$ (1,050.00)
$ (2,400.00)
1
$ 660.00
$ 1,600.00
2
$ 750.00
$ 1,360.00
3
$ 180.00
$ 650.00
IRR =
28.70%
27.67%
d.
Incremental IRR =
1.04%
(28.7 -27.67)
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