A company is considering investing in either Project A or Project B. Relevant financial information is as follows:

The companys costs of capital is 8% and the applicable discount rates are as follows:

Year 1 0.926

Year 2 0.857

Year 3 0.794

Year 4 0.735

Required:

1. Calculate, in years and months, the simple payback period for each project. Assume that there are 12 months in a year, that each month has 30 days and that annual cash flows occur at an even rate throughout the year.
2. Calculate, to the nearest $1, the net present value of each project. Assume that net cash inflows are received at the end of each year.
3. Using only the results calculated in (b) above, recommend which project should be undertaken and give one reason for your recommendation.
4. Give two disadvantages of using the simple payback method of appraisal when compared to the net present value method of appraisal.

Project A Project B 64,000 100,000 Initial capital cost of equipment Estimated net annual cash inflows: Year 1 Year 2 Year 3 Year 4 Life of project 24,000 18,000 16,000 10,000 36,000 42,000 40,000 4,000 4 years 4 years