Newland Company 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 discount rate for both projects is 18% per cent.

Cash Flow Project A Project B

$ $

Initial Cost 3,000,000 3,500,000

Net Cash Inflows

Year 1 800,000 1,000,000

Year 2 800,000 1,000,000

Year 3 1,200,000 700,000

Year 4 1,200,000 800,000

Year 5 1,200,000 800,000

Year Factor

1 0.8475

2 0.7182

3 0.6086

4 0.5158

5 0.4371

Discount factors for the projects @18% per annum are as follows:

Required:

(a) Calculate the payback period for each project and identify the project in which the company should invest, giving ONE reason for your choice.

(b) Calculate the Accounting Rate of Return on initial capital for each project.