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 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.

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

Cash Flows of both the projects are:

	0	1	2	3	4
Project A	-950	650	385	260	310
Project B	-950	250	320	410	760

A) Project A's payback can be calculated as:

Year	Cash Flow	Cumulative CF
1	650	650
2	385	1035
	Required CF	950

Thus, the Payback period of Project A = 1 year + (300/385) year = 1.7792 Years

B) Project A's discounted payback can be calculated as:

Year	Discounted Cash Flow	Cumulative CF
1	650/(1+9%)^1 = 596.3303	596.3303
2	385/(1+9%)^2 = 324.0468	920.3771
3	260/(1+9%)^3 = 200.7677	1121.1448

Thus, the Discounted payback period of Project A = 2 years + (29.6229/200.7677) year = 2.1476 Years

C) Project B's payback can be calculated as:

Year	Cash Flow	Cumulative CF
1	250	250
2	320	570
3	410	980

Thus, the Payback period of Project B = 2 years + (380/410) year = 2.9268 Years

D) Project B's discounted payback can be calculated as:

Year	Discounted Cash Flow	Cumulative CF
1	250/(1+9%)^1 = 229.3578	229.3578
2	320/(1+9%)^2 = 269.3376	498.6954
3	410/(1+9%)^3 = 316.5952	815.2906
4	760/(1+9%)^4 = 538.4032	1353.6938

Thus, the Discounted payback period of Project B = 3 years + (134.7094/538.4032) year = 3.2502 Years