Question

Novell, Inc., has the following mutually exclusive projects. Year Project A Project B 0 $18,000 $21,000 11,000 12,000 2 7,500 8,500 3 2,700 7,500 1 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.) Project A Project B years years a-2. If the company's payback period is two years, which, if either of these projects should be chosen? O Project A O Project B O Both projects Neither project b-1. What is the NPV for each project if the appropriate discount rate is 16 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.) Project A Project B b-2. Which, if either of these projects should be chosen if the appropriate discount rate is 16 percent? O Project A Project B O Both projects O Neither project

Answer 1

SA 1. Answer: 2 a) Calculation of payback period 3 Formula 4 Payback period = Year before full recovery of cost + Balance cost to be recovered/cash inflow during the year 5 6 Project A Project B 8 Calculation of cummulative cash inflow Calculation of cummulative cash inflow 9 10 Year Cash inflows Cummulative inflows Year Cash inflows Cummulative inflows 11 1 11,000.00 11,000.00 1 12,000.00 12,000.00 12 2 7,500.00 18,500.00 2 3,500.00 20,500.00 13 3 2,700.00 21,200.00 3 7,500.00 28,000.00 14 15 Initial cost = $18,000 Initial cost = $21,000 16 17 Payback period = 1 years +($18000 - $11000)/$7500 Payback period = 2 years +($21000 - $20500)/$7500 18 = 1 year + 7000/7500 = 2 years + 500/7500 19 = 1 year +0.933 = 2 years +0.067 20 = 1.933 years (Answer) = 2.067 years (Answer) 21 22a-2) If the company's payback period is 2 years then, Project A should be selected 23

ISWetu . 2 b) Calculation of NPV 3. Formula will will use here NPV = Present value of Cash inflows - Initial cost 5 Project A 6 Initial cost 18000.00 7 Year Cash inflows Present value factor @ 16% Present value of cash inflows 8 11000.00 0.86207 9482.76 9 2 7500.00 0.74316 5573.72 10 3 2700.00 0.64066 1729.78 11 Total 16786.26 12 13 NPV 14 Present vallue of cash inflows 16786.26 15 Less. Initial cost 18000.00 16 NPV $1213.74 17 18 62 - Project B should be chosen. 19 Project B Initial cost 21000.00 Year Cash Inflows Present value factor @ 16% Present vaiue of cash inflows 1 12000.00 0.86207 10344 83 2 8500.00 0.74316 6316.88 7500.00 0.64066 4804.93 Total 21466 54 HI NPV Present vallue of cash inflows Less: Initial cost NPV 21466.64 21000.00 $466.64