Payback Payback was the earliest -Select-capital structurefinancial statementcapital budgetingCorrect 1 of Item 1 selection criterion. The...

Payback
Payback was the earliest -Select-capital structurefinancial statementcapital budgetingCorrect 1 of Item 1 selection criterion. The -Select-NPVMIRRIRRpaybackCorrect 2 of Item 1 is a "break-even" calculation in the sense that if a project's cash flows come in at the expected rate, the project will break even. The equation is:

The -Select-shorterlongerCorrect 3 of Item 1 a project's payback, the better the project is. However, payback has 3 main disadvantages: (1) Dollars received in different years are given -Select-lessequalmoreCorrect 4 of Item 1 weight. (2) Cash flows beyond the payback year are ignored. (3) The payback merely indicates when a project's investment is recovered. There is no necessary relationship between a given payback and investor wealth maximization.

A variant of the regular payback is the discounted payback. Unlike regular payback, the discounted payback considers -Select-projectcapitaloverheadCorrect 5 of Item 1 costs. However, the discounted payback still disregards cash flows -Select-duringbeforebeyondCorrect 6 of Item 1 the payback year. In addition, there is no specific payback rule to justify project acceptance. Both methods provide information about -Select-profitabilitywealthliquidityCorrect 7 of Item 1 and risk.

Quantitative Problem: Bellinger Industries is considering two projects for inclusion in its capital budget, and you have been asked to do the analysis. Both projects' after-tax cash flows are shown on the time line below. Depreciation, salvage values, net operating working capital requirements, and tax effects are all included in these cash flows. Both projects have 4-year lives, and they have risk characteristics similar to the firm's average project. Bellinger's WACC is 7%.

	0	1	2	3	4

Project A	-950	650	410	260	310
Project B	-950	250	345	410	760

What is Project A's payback? Round your answer to four decimal places. Do not round your intermediate calculations.

years

What is Project A's discounted payback? Round your answer to four decimal places. Do not round your intermediate calculations.

years

What is Project B's payback? Round your answer to four decimal places. Do not round your intermediate calculations.

years

What is Project B's discounted payback? Round your answer to four decimal places. Do not round your intermediate calculations.

years

Solutions

Expert Solution

We can calculate the desired result in excel sheet as follows

Formulas used in the Excel sheet are:

So, the answers are as follows:

a) Project A's payback period is 1.7317 years

b) Project A's discounted payback period is 1.8377 years

c) Project B's payback period is 2.8659 years

d) Project B's discounted payback period is 3.0607 years

Hope I am able to solve your concern. If you are satisfied hit a thumbs up !!

jeff jeffy answered 1 year ago

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