Lecture 8: Capital Budgeting 8. Comparing Investment Criteria Consider two mutua

Question

Lecture 8: Capital Budgeting 8. Comparing Investment Criteria Consider two mutually exclusive new product launch projects that Nagano Golf is considering. Assume the discount rate for both products is 15 percent. a. Compute the payback period, NPV, IRR, and Profitability Index (PI), Crossover rate for the following two projects. Show your work and fill in the second table below. b. Draw a NPV Profile for both projects (in one picture) c. Suppose these two projects are mutually exclusive. Which project should you accept based on each investment criteria? Project A: Nagano NP-30. Professional clubs that will take an initial investment of $660,000 at Time o. Next five years (Years 1-5) of sales will generate a consistent cash flow of $222,000 per year. Introduction of new product at Year 6 will terminate further cash flows from this project. Nagano NX-20. High-end amateur clubs that will take an initial investment of $420,000 at Time o. Cash flow at Year 1 is $120,000. In each subsequent year cash flow will grow at 10 percent per year. Introduction of new product at Year 6 will terminate further cash flows from this project Project B: Year NP-30 NX-20 -$660,000 222,000 222,000 222,000 222.000 222.000 $420,000 120,000 132.000 145.200 159.720 175.692 NP-30 NX-20 Implications Payback Period PV Future CFs 1- NPV Profitability Index (PI) IRR DPBP

Explanation / Answer

NP-30 NX-20 0 $        -6,60,000.00 $        -4,20,000.00 1 $         2,22,000.00 $         1,20,000.00 2 $         2,22,000.00 $         1,32,000.00 3 $         2,22,000.00 $         1,45,200.00 4 $         2,22,000.00 $         1,59,720.00 5 $         2,22,000.00 $         1,75,692.00 Payback Period 2.97 3.14 Present value $         7,44,178.43 $         4,78,300.55 NPV $            84,178.43 $            58,300.55 PI 1.13 1.14 IRR 0.20 0.20 DPBP 4.24 4.33

Related Questions

Navigate

• Browse (All)
• Browse L
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.