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 10%.

YEARS 0 1 2 3 4

Project A -1,000 650 355 290 340

Project B -1,000 250 290 440 790

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

Year	Cash flows	Cumulative cash flows	PVF	PV of cash flows	Cumulative Present value
0	-1000	-1000	1	-1000	-1000
1	650	-350	0.909090909	590.9090909	-409.0909091
2	355	5	0.826446281	293.3884298	-115.7024793
3	290	295	0.751314801	217.8812923	102.1788129
4	340	635	0.683013455	232.2245748	334.4033877
Payback period = 1 + 350/355 = 1.99 years
Discounted payback period =2+115.7/217.88 = 2.53 years

Project B
Year	Cash flows	Cumulative cash flows	PVF	PV of cash flows	Cumulative Present value
0	-1000	-1000	1	-1000	-1000
1	250	-750	0.909090909	227.2727273	-772.7272727
2	290	-460	0.826446281	239.6694215	-533.0578512
3	440	-20	0.751314801	330.5785124	-202.4793388
4	790	770	0.683013455	539.5806297	337.1012909
Payback period = 3 + 20/790 = 3.03 years
Discounted payback period =3+202.48/539.58 = 3.38 years