Maxwell Software, Inc., has the following mutually exclusive projects. a-1. Calc

Question

Maxwell Software, Inc., has the following mutually exclusive projects. 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.) a-2. Which, if either, of these projects should be chosen? Project A Project B Both projects Neither project b-1. 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.) b-2. Which, if either, of these projects should be chosen if the appropriate discount rate is 15 percent? Project A Project B Both projects Neither project

Explanation / Answer

a-1) Project A Year Cash flow Comm CF 0 -28000 -28000 1 16000 -12000 2 12500 500 3 3700 4200 Payback period is between 1 and 2 years payback period = 1 + 12000/12500            = 1 +0.96            =1.96 years Project B Year Cash flow Comm CF 0 -31000 -31000 1 17000 -14000 2 11000 -3000 -0.24 3 12500 9500 Payback period is between 2 and 3 years payback period = 2 + 3000/12500            = 2 +0.24            = 2.24 years a-2) Project A should be chosen because its paybackback period is shorter b-1) Project A Year Cash flow PV @15% Disc CF CF PV CF/PV 0 -28000 1.0000 -28000.00 1 16000 1.1500 13913.04 2 12500 1.3225 9451.80 3 3700 1.5209 2432.77 NPV -2202.39 Project B Year Cash flow PV @15% Disc CF CF PV CF/PV 0 -31000 1.0000 -31000.00 1 17000 1.1500 14782.61 2 11000 1.3225 8317.58 3 12500 1.5209 8218.82 NPV 319.0068 NPV Project A -2202.39 Project B 319.01 B-2) Project B should be chosen as the NPV is positive

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