Question

Consider two mutually exclusive new product launch projects that Nagano Golf is considering. Assume the discount rate for both products is 16 percent. Project A: Nagano NP-30. Professional clubs that will take an initial investment of $670,000 at Year O. For each of the next 5 years, (Years 1-5), sales will generate a consistent cash flow of $305,000 per year. Introduction of new product at Year 6 will terminate further cash flows from this project. Project B: Nagano NX-20. High-end amateur clubs that will take an initial investment of $740,000 at Year 0. Cash flow at Year 1 is $220,000. 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. Year 0 NP-30 NX-20 5670,000 5740,000 305,000 220,000 305,000 242,000 305,000 266,200 305,000 292,820 305,000 322,102 2 3 4 5 Complete the following table: (Do not round intermediate calculations. Round your "PI" answers to 3 decimal places, e.g., 32.161, and other answers to 2 decimal places, e.g., 32.16. Enter your IRR answers as a percent.) NP-30 NX-20 years years % Payback IRR PI NPV

Answer 1

Payback Period NP-30= Years before recovery + Cost not covered in that year/ Cash flow for that year
=2+(670000-305000-305000)/305000=2.20
Payback Period NX-20= Years before recovery + Cost not covered in that year/ Cash flow for that year
=2+(740000-220000-242000-266200)/305000=3.04

IRR of NP-30 using financial calculator
CF0=-670000;CF1=305000;CF2=305000;CF3=305000;CF4=305000;CF5=305000;CPT IRR =35.59%

IRR of NX-20 using financial calculator
CF0=-740000;CF1=220000;CF2=242000;CF3=266200;CF4=292820;CF5=322102;CPT IRR =22.05%

PV of Cash flows =305000/(1+16%)+305000/(1+16%)^2+305000/(1+16%)^3+305000/(1+16%)^4+305000/(1+16%)^5
=998659.56
PI index of NP-30 =PV of Cash Flows/Initial Investment =998659.56/670000=1.491

PV of Cash flows =220000/(1+16%)+242000/(1+16%)^2+266200/(1+16%)^3+292820/(1+16%)^4+322102/(1+16%)^5
=855122.50
PI index of NX-20 =PV of Cash Flows/Initial Investment =855122.50/740000=1.156

NPV of NP-30 =PV of cash Flows -Initial Investment =998659.56-670000 =328659.76
NPV of NX-20 =PV of cash Flows -Initial Investment =855122.50-740000 =115112.50