You are considering the following two mutually exclusive projects. Both projects will be depreciated using straight-line depreciation to a zero book value over the life of the project. Neither project has any salvage value.

1. Should you accept or reject these projects based on payback analysis? If both are acceptable, which would you choose?

2. Should you accept or reject these projects based on their NPV? If both are acceptable, which would you choose?

3. For Project B only, if you believe that the reinvested cash inflows from Project B can only earn 11% per year for the remainder life of the project, should you invest in Project B?

Project A Year Cash Flow 0 $87,000 Project B Year Cash F 0 $85,000 1 $15,000 2 $20,000 3 $90,000 14 percent 2.5 years 11 percent 1 31,000 2 $37,000 3 $44,000 Required rate of return Required payback period Required accounting return 12 percent 2.5 years 10 percent