RTS Company is evaluating two mutually exclusive projects on the basis of payback. RTS is risk averse and will not accept any project with a payback period over 3 years. Project A has an initial investment of $400,000 and produces incremental operating annual cash flows of $150,000 per year for 5 years. Project B has an initial investment of $350,000 and produces incremental operating annual cash flows of $110,000 for 6 years. Which project(s) should RTS accept?

1.RTS should accept Project A and reject Project B.

2.RTS should accept Project B and reject Project A.

3.RTS should reject both projects.

4.RTS should accept both projects.