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 12%.

Year	A	B
0	(1000.00)	(1000.00)
1	700.00	300.00
2	450.00	385.00
3	280.00	430.00
4	450.00	780.00

What is Project A's payback? 4 decimal places

Project A's discounted payback?4 decimal places

What is Project B's payback? 4 decimal places

Project B's discounted payback? 4 decimal places

Answer 1

Project A's payback = 1.6667 Years

Project A's discounted payback = 2.0816 Years

Project B's payback = 2.7326 Years

Project B's discounted payback = 3.2404 Years

Workings:

Project A's Payback Period = ( Last Year with a Negative Cash Flow ) + [( Absolute Value of negative Cash Flow in that year)/ Total Cash Flow in the following year)]

= 1+(300/450)

= 1.6667 Years

Note:

Year	Investment	Cash Inflow	Net Cash Flow
0	-1,000.00	-	-1,000	(Investment + Cash Inflow)
1	-	700.00	-300	(Net Cash Flow + Cash Inflow)
2	-	450.00	150	(Net Cash Flow + Cash Inflow)
3	-	280.00	430	(Net Cash Flow + Cash Inflow)
4	-	450.00	880	(Net Cash Flow + Cash Inflow)

Project B's Payback Period = ( Last Year with a Negative Cash Flow ) + [( Absolute Value of negative Cash Flow in that year)/ Total Cash Flow in the following year)]

= 2+(315/430)

= 2.7326 Years

Note:

Year	Investment	Cash Inflow	Net Cash Flow
0	-1,000.00	-	-1,000	(Investment + Cash Inflow)
1	-	300.00	-700	(Net Cash Flow + Cash Inflow)
2	-	385.00	-315	(Net Cash Flow + Cash Inflow)
3	-	430.00	115	(Net Cash Flow + Cash Inflow)
4	-	780.00	895	(Net Cash Flow + Cash Inflow)

Project A's Discounted Payback Period =

( Last Year with a Negative Cumulative Cash Flow ) + [( Absolute Value of negative Cumulative Cash Flow in that year)/ Total Present Cash Flow in the following year)]

=2+(16.2628/199.2985)

= 2.0816 Years

Note:

	Cash Flow	Discounting Factor ( 12%)	Present Value (Cash Flow * Discounting Factor)	Cumulative Cash Flow (Present Value of Current Year+ Cumulative Cash Flow of Previous Year)
0	-1,000	1	-1,000.00	-1,000.00
1	700	0.8929	625.00	-375.00
2	450	0.7972	358.7372	-16.2628
3	280	0.7118	199.2985	183.0357
4	450	0.6355	285.9831	469.0188

Project B's Discounted Payback Period =

( Last Year with a Negative Cumulative Cash Flow ) + [( Absolute Value of negative Cumulative Cash Flow in that year)/ Total Present Cash Flow in the following year)]

=3+(119.1577/495.7041)

= 3.2404 Years

Note:

	Cash Flow	Discounting Factor ( 12%)	Present Value (Cash Flow * Discounting Factor)	Cumulative Cash Flow (Present Value of Current Year+ Cumulative Cash Flow of Previous Year)
0	-1,000	1	-1,000.00	-1,000.00
1	300	0.8929	267.86	-732.14
2	385	0.7972	306.9196	-425.2232
3	430	0.7118	306.0655	-119.1577
4	780	0.6355	495.7041	376.5464