Crazy Mama has just heard about payback period and IRR. Assume the CCA rate is 20%, and refer to the following information to answer the questions below.

1. Calculate the payback period.

2. Compare the payback method with the NPV method. Describe a situation where the payback method would be more appropriate to evaluate a capital budgeting decision.

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Relevant Cash Flows at End of Each Year Today 2 3 4 (22,200) Initial investment Annual cash flows from operations 23,000 23,000 23,000 23,000 (excluding depreciation) Cash flow from sale of machine 10,000 Required return on investment 0.10 0.35 Income tax rate Depreciation method straight-line CCA rate declining balance for income tax purposes