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Calculate the payback period of each project. Using the payback period criterion which project is preferable and why? Show workings

Air Ltd. has the option of investing in the following two projects of equal risk; they are mutually exclusive alternatives for expanding the firm's capacity. The firm's cost of capital is 10%. The cash flows for each project are given in the following table. PROJECT B PROJECT A Initial investment 1,120,000 650,000 Year Net cash inflows Net cash inflows 11 350,000 470,000 455,000 2 280,000 3 322,000 220,000 4 210,000 Air Ltd. has incurred a research and development expenditure of $50,000 initially for project A and $30,000 for project B, both of which are considered sunk costs for the business. Due to seasonal demand, business believes that for project A only, they will have to incur additional utility charge of $2,000 each year for first 3 years. Business believes that for project B only, they will have to incur additional maintenance cost of $3,000 in year 1 and $2,000 in year 2. At the end of year 4, the business believes that they could sell project A for $60,000 and at the end of year 3 project B for $40,000. The finance manager has also suggested that any investment that takes more than 3 years to pay back the initial investment should be rejected

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