Maxwell Software, Inc., has the following muturity exclusive projects. Year 0, P
ID: 2732115 • Letter: M
Question
Maxwell Software, Inc., has the following muturity exclusive projects.
Year 0, Project A = -$20,000, Project B = -$23,000
Year 1, Project A = $12,000, Project B = $13,000
Year 2, Project A = $8,500, Project B = $9,500
Year 3, Project A = $2,900, Project B = $8,500
1) Calculate the payback period for each project ( Round answer to 3 decimal places)
A) Project A Payback period ___________ Years
B) Project B Payback period____________Years
2) Which, if either, of these projects should be chosen?
A) Project A
B) Project B
C) Both projects
D) Neither project
3) What is the NPV for each project if the appropriate discount rate is 16%? (A negative number should be indicated by a minus sign) (Round answer to 2 decimal places)
A) Project A = NPV $_______
B) Project B = NPV $_______
4) Which, if either, of these projects should be chosen if the appropriate discount rate is 16%
A) Project A
B) Project B
C) Both projects
D) Neither project
Explanation / Answer
Solution.
1. Calculate the payback period for each project
A) Project A Payback period
= 1 + ( 8,000 / 8,500 ) = 1.94 Year
B) Project B Payback period.
= 2 + ( 7,500 / 8,500 ) = 2.88 year.
2. Which projects should be chosen.
Project A should be choosen because teire pay back period is smaller than project B.
3. Calculation of NPV for each project if the appropriate discount rate is 16%.
4. Selection of project on the basis of NPV.
Project B should be choosen because teireNPV is positive while project A NPV is negetive.
Year Cash Flow Comulative Flow of cash Project A Project B Project A Project B 0 (20,000.00) (23,000.00) 1 12,000.00 13,000.00 12,000.00 13,000.00 2 8,500.00 9,500.00 20,500.00 22,500.00 3 2,900.00 8,500.00 23,400.00 31,000.00