Question
X-treme Vitamin Company is considering two investments, both of which cost $20,000. The cash flows are as follows: Year Project A Project B 1 $
X-treme Vitamin Company is considering two investments, both of which cost $20,000. The cash flows are as follows:
| Year | Project A | Project B | ||||
| 1 | $ | 23,000 | $ | 20,000 | ||
| 2 | 10,000 | 9,000 | ||||
| 3 | 10,000 | 15,000 | ||||
|
| ||||||
Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods.
a-1. Calculate the payback period for Project A and Project B. (Round your answers to 2 decimal places.)
a-2. Which of the two projects should be chosen based on the payback method?
| Project A | |
| Project B |
b-1. Calculate the net present value for Project A and Project B. Assume a cost of capital of 8 percent. (Do not round intermediate calculations and round your final answers to 2 decimal places.)
b-2. Which of the two projects should be chosen based on the net present value method?
| Project B | |
| Project A |
c. Should a firm normally have more confidence in the payback method or the net present value method?
| Net present value method | |
| Payback method PLEASE SHOW ALL WORK |
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