Problem 12-10 Payback and net present value [LO12-3, 12-4]

X-treme Vitamin Company is considering two investments, both of which cost $13,000. The cash flows are as follows:

Year	Project A			Project B
1	$	15,000		$	13,000
2		8,000			7,000
3		6,000			11,000

Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods.

a-1. Calculate the payback period for Project A and Project B. (Round your answers to 2 decimal places.) Project a ________________ Years

Project b ________________ Years

a-2. Which of the two projects should be chosen based on the payback method?

	Project A
	Project B

b-1. Calculate the net present value for Project A and Project B. Assume a cost of capital of 9 percent. (Do not round intermediate calculations and round your final answers to 2 decimal places.) Project a ______________________

Project b ____________________

b-2. Which of the two projects should be chosen based on the net present value method?

	Project B
	Project A

c. Should a firm normally have more confidence in the payback method or the net present value method?

	Net present value method
	Payback method