Maxwell Software, Inc., has the following mutually exclusive projects Year Proje
ID: 2731737 • Letter: M
Question
Maxwell Software, Inc., has the following mutually exclusive projects
Year Project A Project B
0 -$23,000 -$26,000
1 13,500 14,500
2 10,000 11,000
3 3,200 10,000
a-1. Calculate the payback period for each project.
Payback period
Project A years
Project B years
a-2. Which, if either, of these projects should be chosen? 1. Project A 2. Project B 3. Both Projects 4. Neither project
b-1. What is the NPV for each project if the appropriate discount rate is 17 percent?
NPV
Project A $
Project B $
b-2. Which, if either, of these projects should be chosen if the appropriate discount rate is 17 percent? 1. Project A 2. Project B 3. Both projects 4. Neither project
Explanation / Answer
Part a-1)
To compute payback period, we first need to prepare cumulative cash flow table
Project A
Year
CF
CCF
0
-23000
-23000
1
13500
-9500
2
10000
500
3
3200
3700
Payback period = last year of negative ccf + last negative ccf/ cf in first year of positive ccf
= 2 + 9500/ 10000
= 2.95 years
Project B
Year
CF
CCF
0
-26000
-26000
1
14500
-11500
2
11000
-500
3
10000
9500
Payback period = last year of negative ccf + last negative ccf/ cf in first year of positive ccf
= 3 + 500/ 10000
= 3.05 years
Part a-2
Project A should be selected as it has lower payback period.
Part b-1
To compute NPV, we need to discount all the cash flows, and add the Present values.
Project A
Year
CF
PV factor 17%
Pv
0
-23000
1
-23000.00
1
13500
0.854701
11538.46
2
10000
0.730514
7305.14
3
3200
0.624371
1997.99
NPV
-2158.42
So NPV is -2158.42
Project B
Year
CF
PV factor 17%
Pv
0
-26000
1
-26000.00
1
14500
0.854701
12393.16
2
11000
0.730514
8035.65
3
10000
0.624371
6243.71
NPV
672.52
Part b-2
Since NPV of project B is greater, Project B should be selected.
Year
CF
CCF
0
-23000
-23000
1
13500
-9500
2
10000
500
3
3200
3700