Question

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

  

Year		Project A		Project B
0		–$27,000		–$30,000
1		15,500		16,500
2		12,000		10,500
3		3,600		12,000

  

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.)

  

	Payback period
Project A	years
Project B	years

Answer 1

For Project A,

Maxwell Software Inc invested $ 27,000 in year 0

In year 1, Cash flow received by Maxwell Software = $ 15,500

In year 2, Cash flow received by Maxwell Software = $ 12,000

So, the cumulative Cash flow after year 2 received is = $ 15500 + 12000 = $27500

So, we canconclude that the investment of $ 27000 will be received before 2 years and after 1 year

Hence the exact Payback period = 1 + [(27000 - 15500)/ 12000 ]

= 1 + [11500/12000]

= 1.958 Years ( answer)

For Project B,

Maxwell Software Inc invested $ 30,000 in year 0

In year 1, Cash flow received by Maxwell Software = $ 16,500

In year 2, Cash flow received by Maxwell Software = $ 10,500

So, the cumulative Cash flow after year 2 received is = $ 16500 + 10500 = $27000

In year 3, Cash flow received by Maxwell Software = $ 12,000

So, the cumulative Cash flow after year 3 received is = $ 27000 + 12000 = $39000

So the payback period will be between 2 and 3 years

The xeact payback period = 2 + [(30000 - 27000)/12000 ]

= 2 + [ 3000 / 12000 ]

= 2.250 years (answer)