Problem 12-10 Payback and net present value [LO3, 4]

X-treme Vitamin Company is considering two investments, both of which cost $10,000. The cash flows are as follows:

Year	Project A			Project B
1	$	12,000		$	10,000
2		8,000			6,000
3		6,000			16,000

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.)

	Payback Period
Project A	year(s)
Project B	year(s)

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 10 percent.(Do not round intermediate calculations and round your final answers to 2 decimal places.)

	Net Present Value
Project A	$
Project B	$

b-2.

Which of the two projects should be chosen based on the net present value method?

	Project A
	Project B

c.

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

	Payback method
	Net present value method