Question

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 8%.

	0		1		2		3		4
Project A	-1,300		700		385		290		340
Project B	-1,300		300		320		440		790

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

Answer 1

Project A
Year	Cash flow stream	Cumulative cash flow
0	-1300	-1300
1	700	-600
2	385	-215
3	290	75
4	340	415
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-(-215))/(75-(-215))
2,7414 Years
Project A
Year	Cash flow stream	Cumulative cash flow
0	-1300	-1300
1	700	-600
2	385	-215
3	290	75
4	340	415
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-(-91,57))/(158,35-(-91,57))
3,3664 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	-1300	-1300
1	300	-1000
2	320	-680
3	440	-240
4	790	550
Payback period is the time by which undiscounted cashflow cover the intial investment outlay
this is happening between year 3 and 4
therefore by interpolation payback period = 3 + (0-(-240))/(550-(-240))
3,3038 Years
Project B
Year	Cash flow stream	Cumulative cash flow
0	-1300	-1300
1	300	-1000
2	320	-680
3	440	-240
4	790	550
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-(-398,59))/(182,09-(-398,59))
3,6864 Years
Where
Discounting factor =(1 + discount rate)^(corresponding year)
Discounted Cashflow=Cash flow stream/discounting factor