Question

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 9%.

	0		1		2		3		4
Project A	-900		700		385		220		270
Project B	-900		300		320		370		720

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

years

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

years

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

years

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

years

Answer 1

Project A
Year	Cash flow stream	Cumulative cash flow
0	-900	-900
1	700	-200
2	385	185
3	220	405
4	270	675
Payback period is the time by which undiscounted cashflow cover the intial investment outlay
this is happening between year 1 and 2
therefore by interpolation payback period = 1 + (0-(-200))/(185-(-200))
1.52 Years
Project B
Year	Cash flow stream	Cumulative cash flow
0	-900	-900
1	300	-600
2	320	-280
3	370	90
4	720	810
Payback period is the time by which undiscounted cashflow cover the intial investment outlay
this is happening between year 2 and 3
therefore by interpolation payback period = 2 + (0-(-280))/(90-(-280))
2.76 Years
Project A
Year	Cash flow stream	Cumulative cash flow
0	-900	-900
1	700	-200
2	385	185
3	220	405
4	27000.00%	675
Discounted payback period is the time by which discounted cashflow cover the intial investment outlay
this is happening between year 1 and 2
therefore by interpolation payback period = 1 + (0-(-257.8))/(66.25-(-257.8))
1.8 Years
Where
Discounting factor =(1 + discount rate)^(corresponding year)
Discounted Cashflow=Cash flow stream/discounting factor
Project B
Year	Cash flow stream	Cumulative cash flow
0	-900	-900
1	30000.00%	-600
2	320	-280
3	370	90
4	720	810
Discounted payback period is the time by which discounted cashflow cover the intial investment outlay
this is happening between year 3 and 4
therefore by interpolation payback period = 3 + (0-(-69.73))/(440.34-(-69.73))
3.14 Years
Where
Discounting factor =(1 + discount rate)^(corresponding year)
Discounted Cashflow=Cash flow stream/discounting factor