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	-950		650		385		260		310
Project B	-950		250		320		410		760

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

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

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

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

Answer 1

- Calculating payback Period of Project A and Project B:-

Year	Cash Flows of Project A($)	Cummulative Cash Flows of Project A ($)	Cash Flows of Project B ($)	Cummulative Cash Flows of Project B ($)
0	(950.00)	(950.00)	(950.00)	(950.00)
1	650.00	(300.00)	250.00	(700.00)
2	385.00	85.00	320.00	(380.00)
3	260.00	345.00	410.00	30.00
4	310.00	655.00	760.00	790.00
	655.00		790.00

Payback Period = Years before the Payback period occurs + (Cummulative cash flow in the year before recovery/Cash flow in the year before recovery)

- Payback Period for Project A = 1 year + (300/385)

Payback Period for Project A = 1.7792 years

- Payback Period for Project B = 2 year + (380/410)

Payback Period for Project A = 2.9268 years

- Calculating Discounted Payback Period of Project A and Project B:-

Year	PV Factor @9.00% (a)	Cash Flows of Project ($) (b)	Present Value of Cash Flows of Project A ($) [(a)*(b)]	Cummulative Cash Flows of Project A ($)	Cash Flows of Project B ($) (c)	Present Value of Cash Flows of Project B($) [(a)*(c)]	Cummulative Cash Flows of Project B ($)
0	1.0000	(950.00)	(950.00)	(950.00)	(950.00)	(950.00)	(950.00)
1	0.9174	650.00	596.33	(353.67)	250.00	229.36	(720.64)
2	0.8417	385.00	324.05	(29.62)	320.00	269.34	(451.30)
3	0.7722	260.00	200.77	171.14	410.00	316.60	(134.71)
4	0.7084	310.00	219.61	390.76	760.00	538.40	403.69
		655.00	390.76		790.00	403.69

Discounted Payback Period = Years before the Discounted Payback period occurs + (Cummulative cash flow in the year before recovery/Discounted Cash flow in the year before recovery)

-  Discounted Payback Period for Project A = 2 years + (29.62/200.77)

Discounted Payback Period for Project A = 2.1475 years

-  Discounted Payback Period for Project B = 3 years + (134.71/538.40)

Discounted Payback Period for Project B = 3.2502 years

Note- PV Factor@9% can be taken from PVAF Table or calculated using this formula which is = 1/(1+0.09)^n

where, n = Respective year.

For example, PV Factor@9% of 2nd year = 1/(1+0.09)^2 = 1/1.1881 = 0.8417

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