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 -900 700 425 290 340 Project B -900 300 360 440 790

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

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

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

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

Answer 1

Project A
Year	Cash flows	Cumulative Cash flows
0	-900	-900
1	700	-200
2	425	225
3	290	515
4	340	855
Payback period = 1+200/425 = 1.4706 years
Project A
Year	Cash flows	Discount rate	Discounted cash flows	Cumulative Discounted cash flows
0	-900	1	-900	-900
1	700	0.892857143	625	-275
2	425	0.797193878	338.807398	63.80739796
3	290	0.711780248	206.4162719	270.2236698
4	340	0.635518078	216.0761467	486.2998165
Discounted payback period = 1+ 275/338.81 = 1.8117 years

Project B
Year	Cash flows	Cumulative Cash flows
0	-900	-900
1	300	-600
2	360	-240
3	440	200
4	790	990
Payback period = 2+240/440 = 2.5455 years
Project B
Year	Cash flows	Discount rate	Discounted cash flows	Cumulative Discounted cash flows
0	-900	1	-900	-900
1	300	0.892857143	267.8571429	-632.1428571
2	360	0.797193878	286.9897959	-345.1530612
3	440	0.711780248	313.183309	-31.96975219
4	790	0.635518078	502.0592819	470.0895298
Discounted payback period = 3+ 31.97/502.06 = 3.0637 years