Explain investment appraisal techniques

Explain investment appraisal techniques - Payback Period

Reference no: EM132368585

Corporate Finance Questions -

Q1. a. Explain the following investment appraisal techniques and discuss their decision criteria.

Net Present Value
Payback Period
Internal rate of return

b. Discuss advantages and disadvantages associated with the above techniques.

Q2. 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.

Year	Board Game	DVD
0	-$750	-$1,800
1	600	1,300
2	450	850
3	120	350

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?

Q3. Hanmi Group, a consumer electronics conglomerate, is reviewing its annual budget in wireless technology. It is considering investments in three different technologies to develop wireless communication devices. Consider the following cash flows of the three independent projects for Hanmi. Assume the discount rate for Hanmi is 10 percent. Further, Hanmi Group has only $20 million to invest in new projects this year.

Project	CDMA	G4	Wi-Fi
Year 0	$(8,000,000)	$(12,000,000)	$(20,000,000)
1	11,000,000	10,000,000	18,000,000
2	7,500,000	25,000,000	32,000,000
3	2,500,000	20,000,000	20,000,000

a. Based on the profitability index decision rule, rank these investments.

b. Based on the NPV, rank these investments.

c. Based on your findings in (a) and (b), what would you recommend to the CEO of Hanmi Group and why?

Reference no: EM132368585

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