ABC company is analyzing two independent projects. Project A has an initial cost of $239,500 and cash flows of $132,400 and $138,500 in Year 1 and Year 2. Project B has an initial cost of $235,200 and cash flows of $137,000 and $150,500 in Year 2 and Year 3. Investors' required rate of return is 8 percent. Company's optimal payback period is 2 years and 3 years on a discounted basis.

1. Make decision about projects based on NPV and Payback period. Show your calculations.

2. What is the sensitivity of Project A (NPV) to changes in the initial cost ?