Question

X-treme Vitamin Company is considering two investments, both of which cost $47,000. The cash flows are as follows:

Year	Project A			Project B
1	$	50,000		$	47,000
2		20,000			19,000
3		18,000			25,000

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

Answer 1