Maxwell Software, Inc., has the following mutually exclusive projects. Year Proj
ID: 2744801 • Letter: M
Question
Maxwell Software, Inc., has the following mutually exclusive projects. Year Project A Project B 0 –$17,000 –$20,000 1 10,500 11,500 2 7,000 8,000 3 2,600 7,000 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 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.) NPV Project A $ Project B $ 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
Project A:
Payback period = 1 year + 17,000 - 10,500 / 7,000 = 1.929 years
NPV at 15% discount rate = 10,500 x 0.8696 + 7,000 x 0.7561 + 2,600 x 0.6575 = 9,130.8 + 5,292.7 + 1,709.5 - 17,000 = $ (867)
Project B:
Payback period = 2 years + 20,000 - 9,500 / 7,000 = 2.071 years
NPV = 11,500 x 0.8696 + 8,000 x 0.7561 + 7,000 x 0.6575 - 20,000 = $ ( 10,000.4 + 6,048.8 + 4,602.5 - 20,000) = $ 651.7
Since the NPV of Project A is negative, it should not be chosen. Project B has a positive NPV, but a long payback period.
Year Cash inflows Cumulative cash flows 1 10,500 10,500 2 7,000 17,500 3 2,600 20,100