A firm has Si 00 million available for capital expenditures. It is considering investing in one of two projects; each has a cost of S100 million. Project A has an IRR of 20 percent and an XPV of S9 million. It will be terminated ar the end of 1 year at a profit of S20 million, resulting in an immediate increase in earnings per share (EPS). Project B, which cannot be postponed, has an IRR of 30 percent and an XPV of S50 million. How ever, the firm's short-run EPS will be reduced if it accepts Project B, because no revenues will be generated for several years.

a. Should the short-run effects on EPS influence the choice between the two projects?

b. How might situations like the one described here influence a firm's decision to use payback as a part of the capital budgeting process?

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