payback period

May 13th, 2015
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2. Two new software projects are proposed to a young, start-up company. The Alpha project will cost $150,000 to develop and is expected to have annual net cash flow of $40,000. The Beta project will cost $200,000 to develop and is expected to have annual net cash flow of $50,000. The company is very concerned about their cash flow. Using the payback period, which project is better from a cash flow standpoint? Why? Answer:-

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Assignmnet 1MSA-674Assignment-I2. Two new software projects are proposed to a young, start-up company. The Alpha project will cost $150,000 to develop and is expected to have annual net cash flow of $40,000. The Beta project will cost $200,000 to develop and is expected to have annual net cash flow of $50,000. The company is very concerned about their cash flow. Using the payback period, which project is better from a cash flow standpoint? Why? Answer:- Payback = Investment / Annual SavingsProject AlphaProject BetaDevelop cost(Investment)$150,000$200,000Annual net cash flow$40,000$50,000Payback3.75 years4.0 yearsProject Alpha is the better from a cash flow standpoint, as it returns investment in 3.75 years whereas project Beta pays off in 4 years. But both can be acceptable since both return the initial investment in less than five years.3. A five-year project has a projected net cash flow of $15,000, $25,000, $30,000, $20,000, and $15,000 in the next five years. It will cost $50,000 to implement the project. If the required rate of return is 20 percent, conduct a discounted cash flow calculation to determine the NPV? Answer: - Referred (Exhibit 2.3) from the textbook.Year 1Year 2Year 3Year 4Year 5Required ROI20%Outflows-$50,000Inflows$15,000$25,000$30,000$20,000$15,000Total return in 5 years = $105,000NPV formula in Excel* = -$50,000 + NPV (20%, $105,000)NPV = $12,8955.You are the head of the project selection team at SIMSO

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