a) Based on the payback period, the payback period for the project (A) is 2.66 years and the payback period for the project ( B) is 2.02 years. This means that project (A) will recover its initial investment in 2.66 years and project (B) will recover its initial investment in 2.02 years. The company should choose project (B) because the payback period of project (B) is shorter than the payback period of project (A) and is less than the 4-year maximum payback required by the company. The shorter and faster the payback period of a project and with a payback period less than a specified number of years (Kaplan Higher Education Study Guide, 2015, p. 74). Additionally, the project with a shorter payback period has fewer threats than the project with a longer payback period. They allow the company to recover the investment more quickly so that the money can be reinvested elsewhere. The payback period represents the total time it takes for a capital budgeting project to recoup its main cost. b) Based on net present value (NPV), the NPV of project (A) is $21,152.94 and the NPV of project (B) is $7,783.10. The company should choose project (A) because project (A) has a higher NPV than project (B). The general rule is that when the NPV is positive, the project should be accepted because projects with a positive NPV are expected to increase the value of the company or shareholder wealth. On the other hand, when the NPV is negative, the project should not be accepted. undertaken because the investment will not add value to the business (Kaplan Higher Education Study Guide, 2015, p. 71); in the case of mutually exclusive projects, the project with the highest net present value must be accepted. Thus, NPV makes the decision...... middle of paper ...... money and value of cash flows in future periods. Furthermore, the NPV approach has no major flaws (Kaplan Higher Education Study Guide, 2015, p. 94) and is the desired method for evaluating projects because it takes into account risk and the time value of money, and has no random threshold. NPV is easy to use, easily comparable and customizable. Only if all alternatives are discounted at the same time does the NPV allow a simple comparison between investment alternatives. It provides clear decision suggestions for investments. The NPV rule also effortlessly handles mutually exclusive and independent projects as compared to IRR which cannot be used for exclusive projects or those of different periods, IRR can exaggerate the rate of return and also the profitability index, this which may not give the right choice. when used to compare mutually exclusive projects.