Chapter 11, Problem 4QS

To determine

Concept introduction:

Payback Period: Payback period is the period in which the project recovers its initial cost of the investment. It can be calculated by dividing the initial investment by the annual cash inflow from the project.

NPV: Net present value (NPV) is the method to evaluate the project feasibility. This method calculates the present value of cash inflows and outflows, and then calculates the net present value of the investment. A project should be accepted if it has a positive NPV. The formula to calculate the NPV is as follows:

$NPV= Presentvalueofcashinflows–Presentvalueofcashoutflows$

Requirement 1:

To indicate:

The investment preferred on the basis of payback period.

To determine

Concept introduction:

Payback Period: Payback period is the period in which the project recovers its initial cost of the investment. It can be calculated by dividing the initial investment by the annual cash inflow from the project.

NPV: Net present value (NPV) is the method to evaluate the project feasibility. This method calculates the present value of cash inflows and outflows, and then calculates the net present value of the investment. A project should be accepted if it has a positive NPV. The formula to calculate the NPV is as follows:

$NPV= Presentvalueofcashinflows–Presentvalueofcashoutflows$

Requirement 2:

To indicate:

The possible reason for choosing investment B over A.