Using the payback period and unadjusted rate of return to evaluate alternative investment opportunities Jessica and Victor Services is planning a new business venture. With $100,000 of available funds to invest, it is investigating two options. One is to acquire an exclusive contract to operate vending machines in civic and recreation centers in a small suburban city for four years. The contract requires the firm to pay the city $40,000 cash at the beginning. The firm expects the cash revenue from the operation to be $50,000 per year and the cash expenses to be $28,000 per year.

The second option is to operate a printing shop in an office complex. This option would require the company to spend $72,000 for printing equipment that has a useful life of four years with a zero salvage value. The cash revenue is expected to be $85,000 per year and cash expenses are expected to be $47,000 per year. The firm uses the straight-line method of depreciation. Its effective income tax rate is expected to be 20 percent.

Required

a. Determine the payback period and unadjusted rate of return (use average investment) for each alternative.

b. Indicate which investment alternative you would recommend. Explain your choice.