A few small projects could be funded and the decision to be made is which should get the money. Rangi has been granted the use of $15,000 for a maximum of two years. She is considering three projects. Project A costs $7,500 and has cash flows of $4,000 a year for Years 1 to 3. Project B costs $8,000 and has cash flows of $3,000, $4,000, and $3,000 for Years 1 to 3, respectively. Project C costs $2,000 and has a cash inflow of $2,500 in Year 2.
a. What decisions should she make regarding these projects if she assigns them a mandatory discount rate of 8.5 percent?
b. Explain why your answers in a. above are correct.
c. What is the difference between discounted payback and NPV approach? Demonstrate with an example.