SmithLtd is a small company established in Exeter some years ago. Over the last couple of years, the company has been facing tough competition from some newly established local businesses, which is reflected in decreasing sales and annual profit of the company. From the beginning of last year, the managers of SmithLtd have been considering two mutually exclusive projects (Project A and Project B) in order to widen the range of products offered by the company. The managers believe that this will reduce the vulnerability of SmithLtd to local competition and improve the company's profitability.

Project A requires an initial capital investment of 160,000 with an expected economic life of five years, and no residual value at the end of the five-year period. Annual accounting profit after depreciation is expected to be 40,000 over the economic life of the project.

Project B requires an initial capital investment of 80,000 with an expected economic life of four years, and no residual value at the end of the four-year period. Expected sales and costs are summarised in the table below:

Year 1 Year 2 Year 3 Year 4 Sales (E) 110,000 130,000 148,000 151,000 Material cost (E) 40,000 50,000 59,000 60,500 Labour cost (E) 20,000 24,000 27,600 28,200 WAAAAAA Fixed cost excluding 10,000 10,000 10,000 10,000 depreciation (E)