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%.

	0		1		2		3		4
Project A	-1,150		650		360		280		330
Project B	-1,150		250		295		430		780

- 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 =Years until full recovery+(umrecovered Cos at the beginning of the last year/Cashflow During the last year)

Project A Initial investment =1,150 Cash inflows are 650 for Year 1 360 for Year 2 280 for year 3 and 330 for year 4

After the first two years the project requires(1,150-(650+360)) $140 more to pay for itself.In year 3 the inflow is $280,this means that the payback occurs sometim between years 2 and 3.So payback period =2+($140/$280)=2.5years

Discounted payback is calculated by discounting the inflows to their present values by given hurdle rate(WACC here) which is 12% and then applying the formula:Payback period =Years until full recovery+(unrecovered Cos at the beginning of the last year/Cashflow During the last year)

Pv of Inflows for A =Year 1 $650*.89286 =$580.359 Year 2 =$360*.79719 =$286.988 Year 3 = 280*.71178 =$199.298 Year 4 =$330*.63552=$209.721 Initial outflow =$1150

After 3 years the project requires $83.355 (1150-($580.359+$286.988+$199.298) to pay for itself the year 4 pv of inflow is $209.721 .So discounted payback period for A =3+(83.355/209.721)=3.3974 years

Project B initial Investment =$1150 Cash inflows are $250 for Year 1 $295 for year 2 $430 for Year 3 and $780 for Year 4.

After the first 3 years the project the project requires(1,150-(250+295+430))$175 more to pay for itself.In year 4 the cash inflow is $780,this means that the payback occurs sometime between year 3 and year 4

So payback period for Project B =3+($175/$780)=3.22 years

Discounted payback is calculated by discounting the inflows to their present values by given hurdle rate(WACC here) which is 12% and then applying the formula:Payback period =Years until full recovery+(unrecovered Cos at the beginning of the last year/Cashflow During the last year)

PV of inflows for B = Year 1 $250*.9286=$223.215 Year 2 $295*.79719=$235.171 Year 3 $430*.71178=$306.06 Year 4 = $780*.63552=$495.705 Initial outflow =$1150

After 3 years the project requires $385.554($1150-($223.215+$235.171+$306.06))to pay for itself .the Year 4 pv of inflow is $495.705.So the payback occurs sometime between year 3 and year 4 .So discounted payback period for Project B=3+(385.554/495.705)=3.777years

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