Question

Novell, Inc., has the following mutually exclusive projects.

  

Year		Project A		Project B
0		–$21,000		–$24,000
1		12,500		13,500
2		9,000		10,000
3		3,000		9,000

  

a-1.	Calculate the payback period for each project. (Do not round intermediate calculations and round your answers to 3 decimal places, e.g., 32.161.)

Project A: _____ years

Project B: _____ years

b-1.	What is the NPV for each project if the appropriate discount rate is 17 percent? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

Project A NPV: _____

Project B NPV: _____

Answer 1

Project A

Year	0	1	2	3
Cashflow(in $)	(21,000)	12,500	9,000	3,000
Cumulative Cashflow(in $)	(21,000)	(8,500)	500	3,500

Payback Period = A+(B/C)

where

A - last period containing negative cumulative cash flow = 1

B - absolute value of cumulative cash flow in A = 8500

C - cash flow during the period after A = 9000

Payback Period = 1+(8500/9000)

= 1.944 years

Year	Cashflow	PVF@17%	Cashflow*PVF
0	(21,000)	1	(21,000.00)
1	12,500	0.8547	10,683.76
2	9,000	0.7305	6,574.62
3	3,000	0.6244	1,873.11

NPV = PV of inflows-PV of outflows

= (10686.76+6574.62+1873.11)-21000

= 19131.49-21000

= -1868.51

Project B

Year	0	1	2	3
Cashflow(in $)	(24,000)	13,500	10,000	9,000
Cumulative Cashflow(in $)	(24,000)	(10,500)	(500)	8,500

Payback Period = A+(B/C)

where

A - last period containing negative cumulative cash flow = 2

B - absolute value of cumulative cash flow in A = 500

C - cash flow during the period after A = 9000

Payback Period = 2+(500/9000)

= 2.056 years

Year	Cashflow	PVF@17%	Cashflow*PVF
0	(24,000)	1	(24,000.00)
1	13,500	0.8547	11,538.46
2	10,000	0.7305	7,305.14
3	9,000	0.6244	5,619.34

NPV = PV of inflows-PV of outflows

= (11538.46+7305.14+5619.34)-24000

= 24462.93-24000

= 462.93

You can use the equation 1/(1+i)^n to find PVF using calculator