Question $7$: $(4$ points$)$

You are considering the following two mutually exclusive projects.

Project $1$: Cash Flow in Year $1$: $$21,500,$ Year $2$: $$13,500,$ Year $3$: $$10,000.$ For this project

$1,$ you need to buy a machine in the beginning $($Year $0)$ for $$36,000$ and you can sell it for

$$3,500$ at the end of its useful life in Year $3.$

Project $2$: Cash Flow in Year $1$: $$13,690,$ Year $2$: $$11,500,$ Year $3$: $$25,300.$ For this project

$2,$ you need to buy a machine in the beginning $($Year $0)$ for $$36,000$ but there is no salvage

value $-$ you cannot sell it at the end of its useful life in Year $3.$

For each project, you require $10\%$ rate of return. And you have a limited investment

capital of $$36,000.$

$($a$)$ Calculate NPV of each project. Should you invest in one of the two projects?

If yes, which one and why?

$($b$)$ What is the payback period for each project? Should you use payback period in

your investment decision? Why or why not?