X-treme Vitamin Company is considering two investments, both of which cost $12,000. The cash flows are...

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Finance

X-treme Vitamin Company is considering two investments, both ofwhich cost $12,000. The cash flows are as follows:
Year Project A Project B
1 $ 13,000 $ 12,000
2 5,000 4,000
3 6,000 11,000
Use Appendix B for an approximate answer but calculate yourfinal answer using the formula and financial calculatormethods.
a-1. Calculate the payback period for Project Aand Project B. (Round your answers to 2 decimalplaces.)

Payback Period
Project A year(s)
Project B year(s)
a-2. Which of the two projects should be chosenbased on the payback method?

Project A
Project B

b-1. Calculate the net present value forProject A and Project B. Assume a cost of capital of 8 percent.(Do not round intermediate calculations and round yourfinal answers to 2 decimal places.)

Net Present Value
Project A
Project B

b-2. Which of the two projects should be chosenbased on the net present value method?

Project B
Project A

c. Should a firm normally have more confidence inthe payback method or the net present value method?

Payback method
Net present value method

Answer & Explanation Solved by verified expert

3.9 Ratings (800 Votes)

a1Project A Payback period full years until recovery unrecovered cost at the start of the yearcash flow during the year 0 years 13000 12000 12000 0 years 00833 083 years Project B Payback period 1 year since the first year cash inflow is 12000 a2 Project A should be chosen based on the payback method since it has the lowest payback period b1Project A Net See Answer

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X-treme Vitamin Company is considering two investments, both ofwhich cost $12,000. The cash flows are as follows:YearProject AProject B1$13,000$12,00025,0004,00036,00011,000Use Appendix B for an approximate answer but calculate yourfinal answer using the formula and financial calculatormethods.a-1. Calculate the payback period for Project Aand Project B. (Round your answers to 2 decimalplaces.) Payback PeriodProject Ayear(s)Project Byear(s)a-2. Which of the two projects should be chosenbased on the payback method? Project AProject Bb-1. Calculate the net present value forProject A and Project B. Assume a cost of capital of 8 percent.(Do not round intermediate calculations and round yourfinal answers to 2 decimal places.) Net Present ValueProject AProject Bb-2. Which of the two projects should be chosenbased on the net present value method? Project BProject Ac. Should a firm normally have more confidence inthe payback method or the net present value method? Payback methodNet present value method

Year	Project A		Project B
1	$	13,000	$	12,000
2		5,000		4,000
3		6,000		11,000