Final answer:
To evaluate the two projects, we can use two methods: Payback Period (PBP) and Net Present Value (NPV). Based on the Payback Period, Project B should be chosen. Based on the Net Present Value, Project B also has a higher value and should be chosen.
Step-by-step explanation:
To evaluate the two projects, we can use two methods: Payback Period (PBP) and Net Present Value (NPV).
a) Payback Period (PBP) calculates the time it takes for an investment to recover its initial investment. To calculate the PBP, we find the cumulative cash inflow for each year until it becomes equal or greater than the initial cash outlay. Looking at the cash inflows, we can see that Project A recovers its cash outlay in Year 5, while Project B recovers its cash outlay in Year 4. Therefore, Project B has a shorter payback period and should be chosen based on PBP.
b) Net Present Value (NPV) calculates the present value of the expected cash inflows minus the initial cash outlay, discounted at the desired rate of return (interest rate). To calculate the NPV, we use the formula: NPV = (Cash inflow / (1 + Interest rate)^Year) - Cash outlay. For Project A, the NPV would be: (3300 / (1 + 0.15)^1) + (3500 / (1 + 0.15)^2) + (3800 / (1 + 0.15)^3) + (3500 / (1 + 0.15)^4) + (2500 / (1 + 0.15)^5) + (3000 / (1 + 0.15)^6) - 15000 = $9.24. For Project B, the NPV would be: (3000 / (1 + 0.15)^1) + (3500 / (1 + 0.15)^2) + (3800 / (1 + 0.15)^3) + (2500 / (1 + 0.15)^4) + (3000 / (1 + 0.15)^5) + (3500 / (1 + 0.15)^6) - 16000 = $10.61. Based on NPV, Project B has a higher net present value and should be chosen.