EXERCISE 8: DECIDING BETWEEN TWO OPTIONS Luster Electronics Company is analyzing two capital projects, project A and project B. Each has an initial capital cost of $12,000, and the weighted average cost of capital for both projects is 12%. The projected annual cash flows are as follows: Scanned with CamScanner 502 CHAPTER 11 Capital Budgeting Year 0 1 2 Project A ($12,000) 7,000 4,000 3,500 3,000 2,300 2,000 Project B ($12,000) 5,000 3,500 3,000 2,500 2,000 1,500 3 4 5 6 Questions 1. For each project, calculate the following: Payback period Net present value Internal rate of return Profitability index (using the 12% discount rate) 2. Which project or projects should be accepted if the two are independent? 3. Which project should be accepted if the two are mutually exclusive (that is, you can choose only one)