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 8%.

	0		1		2		3		4
Project A	-1,000		600		365		290		340
Project B	-1,000		200		300		440		790

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

  years

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

  years

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

  years

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

  years

Answer 1

Project A

a.Payback period= full years until recovery + unrecovered cost at the start of the year/cash flow during the year

Payback period= 2 years + $35/ $290

                              = 2 years + 0.1207

                              = 2.1207 years.

b.Discounted Payback period= 2 years + $131.51/ $230.21

                                               = 2 years + 0.5713

                                               = 2.5713 years.

Project B

c.Payback period= 3 years + $60/ $790

                              = 3 years + 0.0759

                              = 3.0759 years.

d.Discounted Payback period= 3 years + $208.32/ $580.67

                                                     = 3 years + 0.3580

                                                     = 3.3580 years.

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