Question

Novell, Inc., has the following mutually exclusive projects.

  

Year		Project A		Project B
0		–$21,000		–$24,000
1		12,500		13,500
2		9,000		10,000
3		3,000		9,000

  

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.)

a-2.	If the company's payback period is two years, 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 17 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 17 percent?
	Project A Project B Both projects Neither project

Answer 1

For calculating payback period we are using excel table

Year	0	1	2	3
Project A cash flows	-21000	12500	9000	3000
Cumulative cash flow	-21000	-8500	500	3500
Payback Period	1.94	Payback Period = 1+8500/9000
Year	0	1	2	3
Project B cash flows	-24000	13500	10000	9000
Cumulative cash flow	-24000	-10500	-500	8500
Payback Period	2.06	Payback Period = 2+500/9000

a-1) Payback period of A = 1.94
Payback period of B = 2.06

a-2) Project A should be selected because payback period is less than 2 years.

b-1) NPV of Project A = - 21000 + 12500/(1+17%) + 9000/(1+17%)² + 3000/(1+17%)³ = -1868.51
NPV of Project B = - 24000 + 13500/(1+17%) + 10000/(1+17%)² + 9000/(1+17%)³ = 462.93

b-2) Project B should be selected.

Please Discuss in case of Doubt

Best of Luck. God Bless
Please Rate Well