Maxwell Software, Inc., has the following mutually exclusive projects:

Year Project A Project B

0 -$20,000 -$24,000

1 13,200 14,100

2 8,300 9,800

3 3,200 7,600

a. Suppose the companys payback period cutoff is two years. Which of these two projects should be chosen? (I think that this part is correct; I need this checked, and part b, below, explained)

Project A:

Cumulative cash flows Year 1 = $13200 = $13200

Cumulative cash flows Year 2 = $13200+8300 = $21500

Payback period = 1 + ($20000 13200) / 8300

Payback period = 1.819 years

Project B:

Cumulative cash flows Year 1 = $14100 = $14100

Cumulative cash flows Year 2 = $14100 + 9800 = $23900

Cumulative cash flows Year 3 = $14100 + 9800 +7600 = $31500

Payback period = 2 + ($24000 - $14100 - $9800) / $7600

Payback period = 2.013

Project A has a shorter payback period, so it should be chosen.

b. Suppose the company uses the NPV rule to rank these two projects. Which project should be chosen if the appropriate discount rate is 15 percent?

Discount each projects cash flows at 15 percent. Choose the project with the highest NPV.

Project A:

NPV = -$20000 + 13200 / 1.15 + 8300 / 1.152??? (The example that I was looking at had the .152 here and a .153 later on; I don't know where it came from. Please walk me through the rest of this problem.)