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
a. Which of the two projects should be chosen based on the payback method?
b. Which of the two projects should be chose based on the net present value method? Assume a cost of capital of 10 percent.
c. Should a firm normally have more confidence in answer a or answer b?© BrainMass Inc. brainmass.com October 9, 2019, 7:38 pm ad1c9bdddf
The solution calculates NPV and payback for two projects, and then determines which project would be the best to choose. Excel is used to compute and demonstrate the values generated which are needed in making this decision.