Valley Products, Inc. is considering two independent investments having the follow- ing cash flow streams:
|
Year
|
Project A
|
Project B
|
|
0
|
-$50,000
|
-$40,000
|
|
1
|
þ20,000
|
þ20,000
|
|
2
|
þ20,000
|
þ10,000
|
|
3
|
þ10,000
|
þ5,000
|
|
4
|
þ5,000
|
þ5,000
|
|
5
|
þ5,000
|
þ40,000
|
Valley uses a combination of the net present value approach and the payback approach to evaluate investment alternatives. It requires that all projects have a positive net present value when cash flows are discounted at 10 percent and that all projects have a payback no longer than three years. Which project or projects should the firm accept? Why?