Decor Ltd. has the option of investing inthe following two projects of equal risk; they are mutually exclusive alternatives for expanding the firm's capacity.The firm's cost of capital is 12%.The cash flows for each project are given in the following table.

PROJECT A

PROJECT B

Initial investment

545,000

300,000

Year

Net cash inflows

Net cash inflows

1

135,000

200,000

2

185,000

120,000

3

220,000

92,000

4

280,000

Decor Ltd. has incurred a research and development expenditure of $40,000 initially for project A and $30,000 for project B, both of which are considered sunk costs for the business. Due to seasonal demand, business believes for project A only, they will have to incur additional electricity charge of $2,000 each year till year 4. At the end of year 4, the businessbelievesthat they could sell project A for $62,000 and at the end of year 3, project B for $53,000. The finance manager has also suggested that any investment that takes more than 4 years to pay back the initial investment should be rejected.

Calculate the payback period of each project. Using the payback period criterion which project is preferable and why?