Question

Novell, Inc., Has the following mutually exclusive project

Year Project A Project B

0 $20,000 $23,000

1 12,000 13,000

2 8,500 9,500

3 2,900 8,500

a.1. Calculate the payback period for each period ( do not round intermediate calculations and round your answers to decimal places)

Project A		Years
Project B		Years

a.2 If the company's payback period is two years, which, if either, of these projects, should be chosen?

b.1. What is the NPV for each project if the appropriate discount rate is 16 percent? ( A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places.

Project A		show calculation
Project B		show calculation

Answer 1

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

Payback period for Project-A

Year	Cash Flows ($)	Cumulative net Cash flow ($)
0	(20,000)	(20,000)
1	12,000	(8,000)
2	8,500	500
3	2,900	3,400

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

= 1.00 Year + [$8,000 / $8,500]

= 1.00 Year + 0.94 Years

= 1.94 Years

Payback period for Project-B

Year	Cash Flows ($)	Cumulative net Cash flow ($)
0	(23,000)	(23,000)
1	13,000	(10,000)
2	9,500	(500)
3	8,500	8,000

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

= 2.00 Year + [$500 / $8,500]

= 2.00 Year + 0.06 Years

= 2.06 Years

(a)(2)-DECISION based on the Payback period

PROJECT-A should be selected, since the Payback period for the Project-A is less than the required payback period of 2.00 Years

(b)(1)-The Net Present Value for each Project

Net Present Value for Project-A

Year	Annual cash flows ($)	Present Value Factor (PVF) at 16.00%	Present Value of annual cash flows ($) [Annual cash flow x PVF]
1	12,000	0.862069	10,344.83
2	8,500	0.743163	6,316.88
3	2,900	0.640658	1,857.91
TOTAL		18,519.62

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

= $18,519.62 - $20,000

= -$1,480.38 (Negative NPV)

Net Present Value for Project-B

Year	Annual cash flows ($)	Present Value Factor (PVF) at 16.00%	Present Value of annual cash flows ($) [Annual cash flow x PVF]
1	13,000	0.862069	11,206.90
2	9,500	0.743163	7,060.05
3	8,500	0.640658	5,445.59
TOTAL		23,712.53

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

= $23,712.53 - $23,000

= $712.53

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.