Spice 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

a.What is the payback period for each Project.

b.Based on the payback method, which project should the company invest in and what is the reason.

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

d.Based on the NPV, which project should the company invest in and what is the reason.

e.What are two advantages of using the NPV method.

What are two advantages of using the Payback method.