Question 1 (25 marks) K-Pad is considering replacing its production system with either of two new production systems system A or system B. System A is a highly automated, computer-controlled system that uses cutting edge technology; system B is a less expensive system that uses standard technology. To analyze these alternatives, Janice Yan, a financial analyst, prepared estimates of the initial investment and cash inflows associated with each system. These are shown in the following table.

	System A	System B
Initial investment	$660,000	$360,000
Year	Cash inflows
1	$128,000	$88,000
2	$182,000	$120,000
3	$166,000	$96,000
4	$168,000	$86,000
5	$450,000	$207,000

Note that Janice plans to analyze both systems over a 5-year period. At the end of that time, the systems would be sold, thus accounting for the large fifth-year cash inflows. Janice believes that the two systems are equally risky and that the acceptance of either of them will not change the firms overall risk. She therefore decides to apply the firms 13% cost of capital as the required rate of return. K-Pad requires all projects to have a maximum payback period of 4 years.

1. Use the payback period to determine which system should be chosen.
2. Use NPV to determine which system should be chosen.
3. Summarize the preferences indicated by the techniques used in parts a. and b. Explain which system should be chosen?