Island Corporation is considering investing in one of two projects A or B. The initial

cost and net cash inflows from each project are shown below. The opportunity cost for both

projects is 10% per cent.

Cash Flow Project A Project B

$ $

Initial Cost 5 000 000 5 400 000

Net Cash Inflows

Year 1 1 000 000 1 400 000

Year 2 1 300 000 1 600 000

Year 3 1 300 000 1 600 000

Year 4 1 200 000 1 600 000

Year 5 1 200 000 1 200 000

Discount factors at 10% per annum

Year Factor

1 0.909

2 0.826

3 0.751

4 0.683

5 0.621

Required:

a. Calculate the payback period for each Project.

b. Based on the payback method, identify the project in which the company

should invest, giving ONE reason for your choice.

c. Calculate the net present value (NPV) for Project A and Project B.

d. Based on the NPV, identify the project in which the company should invest,

giving ONE reason for your choice.

e. State TWO advantages of using the NPV method.

f. State TWO advantages of using the Payback method.