X-treme Vitamin Company is considering two investments, both of which cost $20,000. The cash flows are as follows:
| Year |
Project A |
Project B |
| 1 |
$ |
23,000 |
|
$ |
20,000 |
|
| 2 |
|
10,000 |
|
|
9,000 |
|
| 3 |
|
10,000 |
|
|
15,000 |
|
|
Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods.
a-1. Calculate the payback period for Project A and Project B. (Round your answers to 2 decimal places.)
a-2. Which of the two projects should be chosen based on the payback method?
Project A
Project B
b-1. Calculate the net present value for Project A and Project B. Assume a cost of capital of 8 percent. (Do not round intermediate calculations and round your final answers to 2 decimal places.)
b-2. Which of the two projects should be chosen based on the net present value method?
Project B
Project A
c. Should a firm normally have more confidence in the payback method or the net present value method?
Net present value method
Payback method