A firm is considering two mutually exclusive investments, each with an initial outlay of $10,000 and an
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A firm is considering two mutually exclusive investments, each with an initial outlay of $10,000 and an expected life of 3 years. Assume that the firm has a cost of capital of 12 percent for each project. The two investments are of equal risk and have the following cash flows:
| Investment A | Investment B | |
| Cash Flow | Cash Flow | |
| Year 0 | -$10,000 | -$10,000 |
| Year 1 | $4,000 | $6,000 |
| Year 2 | $5,000 | $6,000 |
| Year 3 | $11,000 | $6,000 |
Calculate the payback period and the net present value for each investment.
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