Question

Maxwell Software, Inc., has the following mutually exclusive projects.

  

Year		Project A		Project B
0		–$28,000		–$31,000
1		16,000		17,000
2		12,500		11,000
3		3,700		12,500

  

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.)

  

	Payback period
Project A	years
Project B	years

  

a-2.	Which, if either, of these projects should be chosen?
	Project A Project B Both projects Neither project

  

b-1.	What is the NPV for each project if the appropriate discount rate is 15 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.)

  

	NPV
Project A	$
Project B	$

  

b-2.	Which, if either, of these projects should be chosen if the appropriate discount rate is 15 percent?
	Project A Project B Both projects Neither project

Answer 1

Payback period is the period in which initial cost is recovered.

Project A:

Year	Opening Bal	Cash flow	Clsoing Bal
1	$ 28,000.00	$ 16,000.00	$ 12,000.00
2	$ 12,000.00	$ 12,500.00	$     -500.00
3	$     -500.00	$   3,700.00	$ -4,200.00

PBP = Period in which least +ve CB + [ CB in that year / CF in Next Year ]

= 1 + [ 12000 / 12500 ]

= 1 + 0.96

= 1.96 Years

Project B:

Year	Opening Bal	Cash flow	Clsoing Bal
1	$ 31,000.00	$ 17,000.00	$ 14,000.00
2	$ 14,000.00	$ 11,000.00	$   3,000.00
3	$   3,000.00	$ 12,500.00	$ -9,500.00

PBP = Period in which least +ve CB + [ CB in that year / CF in Next Year ]

= 2 + [ 3000 / 12500 ]

= 2 + 0.24

= 2.24 Years

Part B:

Project A is selected as it has lesser Payback period

Part C:

NPV = PV of Cash Inflwos - PV of Cash outflow

Project A:

Year	CF	PVF @15%	Disc CF
0	$ -28,000.00	1.0000	$ -28,000.00
1	$ 16,000.00	0.869565	$ 13,913.04
2	$ 12,500.00	0.756144	$    9,451.80
3	$    3,700.00	0.657516	$    2,432.81
NPV			$   -2,202.35

Project B:

Year	CF	PVF @15%	Disc CF
0	$ -31,000.00	1.0000	$ -31,000.00
1	$ 17,000.00	0.869565	$ 14,782.61
2	$ 11,000.00	0.756144	$    8,317.58
3	$ 12,500.00	0.657516	$    8,218.95
NPV			$        319.14

Part D:

Project B is selected as it has higher NPV