Strand Plc has the following two mutually exclusive projects available to invest in. the discount rate is 10%. Each project can be undertaken only once.

Cash flows

Project Initial cost Year 1 Year 2 Year 3

1 (500) 400 200 100

2 (1000) 500 400 500

Required:

(a) Calculate the payback period for each of the projects. Based upon the payback criterion which project should be chosen?

(b) Calculate the net present value (NPV) of each project. Based upon the NPV criterion which project should be chosen?

(c) Based on your calculations in (a) and (b) above, what is the final decision concerning which project should be chosen?