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 10%. 0 1 2 3 4 Project A -1,100 600 400 230 280 Project B -1,100 200 335 380 730 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

payback period = n+(-cumulative cash flow in n year/cash flow in year (n+1))

here n = period till which the cumulative cash flow is negative

discounted payback period = n+(-cumulative cash flow in n year/present value of cash flow in year (n+1))

n = period till which the cumulative cash flow is negative