Question

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

  

Year		Project A		Project B
0		–$26,000		–$29,000
1		15,000		16,000
2		11,500		10,000
3		3,500		11,500

  

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 13 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 13 percent?
	Project A Project B Both projects Neither project

Answer 1

(a)(1)-Payback period for each project

Payback Period for PROJECT-A

Year	Annual cash flow ($)	Cumulative net Cash flow ($)
0	-26,000	-26,000
1	15,000	-11,000
2	11,500	500
3	3,500	4,000

Payback Period = Years before full recover + (Unrecovered cash inflow at start of the year/cash flow during the year)

= 1.00 Year + ($11,000 / $11,500)

= 1.00 Year + 0.96 Year

= 1.96 Years

Payback Period for PROJECT-B

Year	Annual cash flow ($)	Cumulative net Cash flow ($)
0	-29,000	-29,000
1	16,000	-13,000
2	10,000	-3,000
3	11,500	8,500

Payback Period = Years before full recover + (Unrecovered cash inflow at start of the year/cash flow during the year)

= 2.00 Year + ($3,000 / $11,500)

= 2.00 Year + 0.26 Year

= 2.26 Years

(a)(2)-Decision based on payback period

“PROJECT-A” should be selected, since it has the lower payback period of 1.96 Years

(b)(1)-Net Present Value (NPV) of each project

Net Present Value (NPV) of PROJECT-A

Year	Annual Cash Flow	Present Value factor at 13.00%	Present Value of Cash Flow
1	15,000	0.884956	13,274.34
2	11,500	0.783147	9,006.19
3	3,500	0.693050	2,425.68
TOTAL			24,706.20

Net Present Value (NPV) = Present Value of annual cash inflows – Initial Investment

= $24,706.20 - $26,000

= -$1,293.80 (Negative NPV)

Net Present Value (NPV) of PROJECT-B

Year	Annual Cash Flow	Present Value factor at 13.00%	Present Value of Cash Flow
1	16,000	0.884956	14,159.29
2	10,000	0.783147	7,831.47
3	11,500	0.693050	7,970.08
TOTAL			29,960.84

Net Present Value (NPV) = Present Value of annual cash inflows – Initial Investment

= $29,960.84 - $29,000

= $960.84

NOTE    

The Formula for calculating the Present Value Factor is [1/(1 + r)ⁿ], Where “r” is the Discount/Interest Rate and “n” is the number of years.

(b)(2)-Decision based on Net Present Value

“PROJECT-B” should be selected, since it has the positive Net Present Value of $960.84.