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 10%.

	0	1	2	3	4
Project A	- 1,000	650	350	240	290
Project B	- 1,000	250	285	390	740

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

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

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

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

Answer 1

PBP	Project A		Project B
Time	Amount	Cumulative	Amount	Cumulative
-	(1,000.00)	(1,000.00)	(1,000.00)	(1,000.00)
1.00	650.00	(350.00)	250.00	(750.00)
2.00	350.00	-	285.00	(465.00)
3.00	240.00	240.00	390.00	(75.00)
4.00	290.00	530.00	740.00	665.00
Payback period		2 Years		3 + 75/740 Years
Payback period				3 + .1014 Years
Payback period				3.1014 Years
Discounted PBP			Project A
Time	Amount	PVf	PV	Cumulative
-	(1,000.00)	1.0000	(1,000.0000)	(1,000.0000)
1.00	650.00	0.9091	590.9091	(409.0909)
2.00	350.00	0.8264	289.2562	(119.8347)
3.00	240.00	0.7513	180.3156	60.4808
4.00	290.00	0.6830	198.0739	258.5547
Discounted PBP = 2 + 119.83/180.32
Discounted PBP = 2 + .6646 Years
Discounted PBP = 2.6646 Years
Discounted PBP			Project B
Time	Amount	PVf	PV	Cumulative
-	(1,000.00)	1.0000	(1,000.00)	(1,000.00)
1.00	250.00	0.9091	227.2727	(772.7273)
2.00	285.00	0.8264	235.5372	(537.1901)
3.00	390.00	0.7513	293.0128	(244.1773)
4.00	740.00	0.6830	505.4300	261.2526
Discounted PBP = 3 + 244.18/505.43
Discounted PBP = 3 + .4831 Years
Discounted PBP = 3.4831 Years