PGA's management team is considering two projects, a golf club project and a helmet project.

WACC = 9.3%

PGA:

% of debt in capital structure 25%

% of equity in capital structure 75%

Before-tax required cost of debt 6%

Tax rate 30%

Cost of equity 11%

B. Capital Budgeting

Project information:

Golf club project           Helmet project

Upfront costs                           (10,000,000)                (8,000,000)

Annual cash flows Year 1                     $0                    $3,000,000

Year 2                                                  $0                    $3,000,000

Year 3                                      $4,000,000                  $2,000,000

Year 4                                      $10,000,000                $2,000,000

1. Which project is superior using the payback method?

2. Show a clear equation for your findings on Excel or a calculator.

3. Show a clear equation for your findings typed.