Valley Products,Inc, is considering two independent investments having the following cash flow streams:
Year Project A Project B
0 -$50,000 -$40,000
1 +$20,000 +$20,000
2 +$20,000 +$10,000
3 +$10,000 +$ 5,000
4 +$ 5,000 +$ 5,000
5 +$ 5,000 +$40,000
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?