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24 May, 19:24

Wii 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 the company. Assume the discount rate is 9 percent.

Year Board Game DVD

0 - $1,200 - $2,700

1 690 1,750

2 950 1,570

3 210 800

What is the payback period for each project?

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  1. 24 May, 22:14
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    The payback period of DVD is 1.61 years and for base game is 1.537 years.

    Explanation:

    Payback period is the period of time taken by a project to recover its initial outflow.

    BOARD GAME

    the initial outflow is $1200,

    payback period

    = 1 year (to recover $690) + 0.537 years [ (1200-690) / 950]

    = 1.537 years.

    DVD

    the initial outlay is $2700

    period to recover the same

    = 1 yr (to recover $1750) + 0.6051 yrs [ (2700-1750) / 1570]

    = 1.6051 years.

    Therefore, The payback period of DVD is 1.61 years and for base game is 1.537 years.
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