Suppose your firm is considering two mutually exclusive, required projects with the cash flows shown as follows. The required rate of return on projects of both of their risk class is 10 percent, and the maximum allowable payback and discounted payback statistic for the projects are two and a half and three and a half years, respectively.
Time 0 1 2 3
Project Acash Flow -1,000 300 400 700
Project B Cash Flow -500 200 400 300
Calculate the payback and use the payback decision rule to evaluate these projects; which one(s) should be accepted or rejected and why?