Maxwell Software, Inc., has the following mutually exclusive projects. Year Proj
ID: 2742434 • Letter: M
Question
Maxwell Software, Inc., has the following mutually exclusive projects. Year Project A Project B 0 –$32,000 –$35,000 1 18,000 19,000 2 14,500 13,000 3 4,100 14,500 Calculate the payback period for each project: Payback period Project A ___years Project B ___years Which, if either, of these projects should be chosen? Project A Project B Both projects Neither project What is the NPV for each project if the appropriate discount rate is 15 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 $______ Which, if either, of these projects should be chosen if the appropriate discount rate is 15 percent? ______ Project A or _____ Project B or _____Both or _____projects Neither project
Explanation / Answer
Answer to Part a : Payback period
PROJECT A
Year
Cash Flow
Cumulative Cash Flow
Year 0
(32,000)
(32,000)
Year 1
18,000
18,000
Year 2
14,500
32,500
Year 3
4,100
36,600
Payback period = 1 + 14,000/14,500 * 12
Payback period = 1 year 11 month 17 days
PROJECT B
Year
Cash Flow
Cumulative Cash Flow
Year 0
(35,000)
(35,000)
Year 1
19,000
19,000
Year 2
13,000
32,000
Year 3
14,500
46,500
Payback period = 2 + 3,000/14,500 * 12
Payback period = 2 year 2 month 14 days
Answer to Part b
Maxwell Software Inc should select Project A, as the Project A has lower Payback period.
Answer to Part c
PROJECT A
Year
Cash Flow
PV factor
PV of Cash Flow
Year 0
(32,000)
1
(32,000)
Year 1
18,000
0.8696
15,652.80
Year 2
14,500
0.7561
10,963.45
Year 3
4,100
0.6575
2,695.75
Total
2,688
NPV of Project A= 2,688
PROJECT B
Year
Cash Flow
PV factor
PV of Cash Flow
Year 0
(35,000)
1
(35,000)
Year 1
19,000
0.8696
16,522.40
Year 2
13,000
0.7561
9,829.30
Year 3
14,500
0.6575
9,533.75
Total
885.45
NPV of Project B= 885.45
Answer to Part d:
As per NPV, Maxwell Software Inc should select Projct A, as Project A has a higher NPV.
Year
Cash Flow
Cumulative Cash Flow
Year 0
(32,000)
(32,000)
Year 1
18,000
18,000
Year 2
14,500
32,500
Year 3
4,100
36,600