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 11%. 0 1 2 3 4 Project A -1,050 700 425 210 260 Project B -1,050 300 360 360 710

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	-1050	-1050
1	700	-350
2	425	75
3	210	285
4	260	545
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-(-350))/(75-(-350))
1.8235 Years
Project A
Year	Cash flow stream	Cumulative cash flow
0	-1050	-1050
1	700	-350
2	425	75
3	210	285
4	260	545
Discounted payback period is the time by which discounted cashflow cover the intial investment outlay
this is happening between year 2 and 3
therefore by interpolation payback period = 2 + (0-(-74.43))/(79.12-(-74.43))
2.4847 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	-1050	-1050
1	300	-750
2	360	-390
3	360	-30
4	710	680
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-(-30))/(680-(-30))
3.0423 Years
Project B
Year	Cash flow stream	Cumulative cash flow
0	-1050	-1050
1	300	-750
2	360	-390
3	360	-30
4	710	680
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-(-224.32))/(243.38-(-224.32))
3.4796 Years
Where
Discounting factor =(1 + discount rate)^(corresponding year)
Discounted Cashflow=Cash flow stream/discounting factor