Problem: You are considering the following two mutually exclusive projects. Both projects will be depreciated using straight-line depreciation to a zero book value over the life of the project. Neither project has any salvage value.
Project A Project B
Year Cash Flow Year
0 -75,000 0 -70,000
1 19,000 1 10,000
2 48,000 2 16,000
3 12,000 3 72,000
Required rate of return 10% 13%
Required Payback Period 2.0 2
Required accounting return 8% 11%
Based upon the payback period and the information provided in the problem, you should:
1) accept both project A and project B.
2) reject both project A and project B.
3) accept project A and reject project B.
4) accept project B and reject project A.
5) require that management extend the payback period for project A since it has a higher initial cost.