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 10 percent.
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?

Answer 1

Answer:

1.61

1.82

NPV A = $433.58 IRR =26.3%

NPV B 719.80 IRR 22.7%

Explanation:

Here are the cash flows used in answering this question :

ear Cash Flows-Traditional Board Game (A) Cash Flows-Interactive DVD (A)

0 $(1,600.00) $(3,500.00)

1 $770.00 $2,150.00

2 $1,350.00 $1,650.00

3 $290.00 $1,200.00

Net present value is the present value of after-tax cash flows from an investment less the amount invested.  

NPV can be calculated using a financial calculator  

Payback calculates the amount of time it takes to recover the amount invested in a project from it cumulative cash flows.

Internal rate of return is the discount rate that equates the after-tax cash flows from an investment to the amount invested