Question

X-treme Vitamin Company is considering two investments, both of which cost $42,000. The cash flows are as follows:

Year	Project A			Project B
1	$	44,000		$	42,000
2		15,000			14,000
3		15,000			20,000

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?
  

	Payback method
	Net present value method

Answer 1