Final answer:
The payback period for Project A is approximately 2.47 years, while for Project B it is approximately 1.1 years.
Step-by-step explanation:
The payback period for an investment project is the time it takes for the cash flows from the investment to repay the initial investment cost. To calculate the payback period for Projects A and B, we simply sum the cash flows year by year until they equal or exceed the initial investment of $22 million.
For Project A:
Year 1: $5 million
Year 2: $5 million + $10 million = $15 million
Year 3: $15 million + $15 million = $30 million
Project A's payback occurs during Year 3.
For Project B:
Year 1: $20 million
Year 2: $20 million + $10 million = $30 million
Project B's payback occurs during Year 1.
To determine the exact payback period, we need to interpolate between the cumulative cash flows to find the fraction of the year when the payback occurs. For Project A, $15 million is recovered by the end of Year 2 and the payback is completed in Year 3. Assuming linear cash flows for simplicity, ($22 million - $15 million) / $15 million = 0.47, so the payback period for Project A is 2 years plus 0.47 years, which rounds to 2.47 years.
For Project B, the payback happens during the first year itself, specifically, $22 million / $20 million = 1.1, which signifies the project pays back just after Year 1, equating to a payback period of approximately 1.1 years.
Therefore, the mentioned correct option in final answer for the payback period is 2.47 years for Project A and 1.1 years for Project B, rounded to two decimal places as requested.