Reference no: EM132487528

A company is considering investing in either Project A or Project B. Relevant information is as follows:

                                  Project A                         Project B

                                 £                              £

Initial Investment     104,000                     200,000

Annual Cash Inflows

Year 1                      50,000                     20,000

Year 2                       40,000                     72,000

Year 3                        28,000                    80,000

Year 4                       8,000                       84,000

Life of Project             4 Years                    4 Years

Salvage Value in 4 Years   24,000                     Nil

The company's cost of capital is 8% and the applicable discount rates are as follows:

Year 1                0.926

Year 2                 0.857

Year 3                 0.794

Year 4                 0.735

Required:

Question (a) Which project has the higher NPV?

Question (b) Calculate in years and months, the payback period for each project.

Question (c) Based upon your calculation in (a and b), advise management to which Project to investment and give reason.