Choosing between two projects with acceptable payback periodsShell Camping Gear, Inc., is considering two mutually exclusive projects. Each requires an initial investment of

$100,000.

John Shell, president of the company, has set a maximum payback period of 4 years. The after-tax cash inflows associated with each project are shown in the following table:

Cash inflows

(CFt)

Year

Project A

Project B

1

$10,000

$40,000

2

$20,000

$30,000

3

$30,000

$20,000

4

$40,000

$10,000

5

$30,000

$30,000

.

a.Determine the payback period of each project.

b.Because they are mutually exclusive, Shell must choose one. Which should the company invest in?

a.The payback period of project A is

nothing

years.(Round to two decimal places.)The payback period of project B is

nothing

years.(Round to two decimal places.)

b.Because they are mutually exclusive, Shell must choose one. Using the payback period, which project should the company invest in?(Select the best answer below.)

Project

B

would be preferred over project

A

because the larger cash flows are in the early years of the project.

Project

A

would be preferred over project

B

because the larger cash flows are in the later years of the project