Please answer the questions 14 & 17 14. Comparing Investment Criteria Wii Brothe

Question

Please answer the questions 14 & 17

14. Comparing Investment Criteria Wii Brothers, a game manufacturer, has a new idea an interactive DVD, but not both. Consider the following cash flows of the two mutually exclusive projects for the company. Assume the discount rate for both projects is 10 percent. Board Game DVD -$950 700 550 130 $2,100 1,500 1,050 450 a. Based on the payback period rule, which project should be chosen? b. Based on the NPV, which project should be chosen? c. Based on the IRR, which project should be chosen? d. Based on the incremental IRR, which project should be chosen?

Explanation / Answer

Question 14:

(A) Payback period

The payback period for Board game inc is calculated as follows:

Payback period = 2 + 250/550 = 2.45 years

Payback perod for Board game = 2.45 years

The payback period for DVD is calculated as follows:

Payback period = 1 + 600/1050 = 1.57 years

Payback period for DVD = 1.57 years

Since DVD has a lower payback period DVD should selected

(b) NPV

The NPV for the two projects is calculated as follows:

Since DVD has a higher NPV, DVD should be selected

(c) IRR
The IRR is calculated is as shown below:

Based on IRR, sinceboth are higher than the required rate of 10%, both of them are profiatble. But Project Board game should be selected since it has a higher IRR

(d) Incremental IRR is as shown below:

We cannot choose a project based on incremental IRR. The incremental IRR just depecist the internal rate of return between differential cash flows of the two projects

Note: We have answered one full question (14) with all sub-parts. Kinsly note that only one full question can be answered at a time. Kindly post the other question sepertely for experts to answer

Board Game Year Cash flow Cumulative cash flow 0 -950 -950 1 700 -250 2 550 300 3 130 430

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