Cameron Camera Company is considering two investments, both of which cost $11,00

Question

Cameron Camera Company is considering two investments, both of which cost $11,000. The cash flows are as follows. (Year 1: Project A: $6,500 Project B: $5,400) (Year 2: Project A: $4,300 Project B: $3,200) (Year 3: Project A: $3,200 Project B: $8,600) a. Which of the two projects should be chosen based on the payback method (show calculations for each) b. Assuming a 10% cost of capital, which of the two projects should be chosen based on the net present value method? c. Should a firm normally have more confidence in answer a or answer b? SHOW ALL WORK

Explanation / Answer

a. payback period of Project A = 2+ (11000-6,500-4,300)/3,200 =2.0625 years payback period of Project B = 2+(11000-5,400-3,200)/8,600 =2.28 years Project A should be chosen based on the payback method b. NPV of project A = -11000 + 6,500/1.1+4,300/1.1^2 + 3,200/1.1^3 =$867.02 NPV of project B = -11000 + 5,400/1.1 +3,200/1.1^2 +8,600/1.1^3 =3015.03 Project B should be chosen based on the net present value method c. Firm should have more confidence in answer b

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