Question

X-treme Vitamin Company is considering two investments, both of which cost $14,000. The cash flows are as follows: Year 1 Project A $16,000 6,000 4,000 Project B $14,000 5,000 9,000 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.) Payback Period year's Project A Project B year's a-2. Which of the two projects should be chosen based on the payback method? Project A Project B

Answer 1

PVIF@8% Cash flows Year Project A Project B | A 1 B | 0 $ (14,000) $ (14,000) 1 $ 16,000 $ 14,000 2 $ 6,000 $ 5,000 3 $ 4,000 $ 9,000 C | 1.000 $ 0.926 $ 0.857 $ 0.794 $ Present value Simple cumulative cash flows Project A Project B Project A Project B AxC | BAC (14,000.00) $ (14,000.00) $ (14,000) $ (14,000) 14,814.81 $ 12,962.96 $ 2,000 $ 5,144.03 $ 4,286.69 $ 8,000 $ 5,000 3,175.33 $ 7,144.49 $ 12,000 $ 14,000 NPV $9,134.18 $ 10,394.15 Payback period 0.88 Years =14000/16000 1.00 Years Based on NPV Based on payback b-2) Project B should choosen NPV is better evaluation tool.

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