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?

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.