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Comparing two finacial alternatives by different methods

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 CD-ROM, but not both. Consider the following cash flows of the two mutually exclusive projects for Mario Brothers. Assume the discount rate Mario Brothers is 10 percent.

Year Board Game CD-ROM
0 -\$300 -\$1,500
1 400 1,100
2 100 800
3 100 400

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?

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Solution:

a. Based on the payback period rule, which project should be chosen?
Payback period for Board Game=0+300/400=0.75
Payback period for CD Roam=1+700/800=1.875

Payback period for Board Game is less, It should be choosen

b. Based on the NPV, which project should be chosen?

PV for Board Game PV for CD Game
Year Board Game CD-Roam Discounted at 10%
0 -300 -1500 -300.00 -1500.00
1 400 1100 363.64 1000.00
2 100 800 82.64 661.16
3 100 ...

Solution Summary

Solution describes the steps in comparing two financial proposals by NPV, IRR, Incremental IRR and Payback criteria.

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