Question

Ch 10: Foundation Problems - The Basics of Capital Budgeting: Evaluating Cash Flows 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% 0 1 2 3 4 Project A -1,100 650 395 260 310 Project B -1,100 250 330 410 760 What is Project A's payback? Do not round intermediate calculations. Round your answer to four decimal places years What is Project A's discounted payback? Do not round intermediate calculations. Round your answer to four decimal places. years What is Project B's payback? Do not round intermediate calculations. Round your answer to four decimal places. years What is Project B's discounted payback? Do not round intermediate calculations. Round your answer to four decimal places years

Answer 1

Project A Payback	2.2115
Project A discounted Payback	2.9350
Project B Payback	3.1447
Project A discounted Payback	3.5624

Workings

Year	Project A	Cumulative CF	DCF	Cumulative DCF	Project B	Cumulative CF	DCF	Cumulative DCF
0	-1100	-1100	-1100.00	-1100.00	-1100	-1100	-1100.00	-1100.00
1	650	-450	590.91	-509.09	250	-850	227.27	-872.73
2	395	-55	326.45	-182.64	330	-520	272.73	-600.00
3	260	205	195.34	12.70	410	-110	308.04	-291.96
4	310	515	211.73	224.43	760	650	519.09	227.13

Payback = Year in which Cumulative CF is last negative -(Last negative cumulative CF/ CF of next year

Discounted Payback = Year in which Discounted Cumulative CF is last negative -(Last negative discounted cumulative CF/ CF of next year)

Book1 - Excel Sign in AutoSave o 9.3HD File Home Insert Draw Page Layout Formulas Data Review View Help Tell me what you want to do - 11 = = = 0 Calibri BIU- insert - Delete - Format - - 0 X Share Comments AY O Sort & Find & Filter - Select Editing Paste General $ -% Number 3 -A A -A- 5 fic -1100 . Conditional Format as Formatting Table - Styles Cell Styles Clipboard Alignment Cells Font V - X А в =D2 с Year Project A 0 -1100 1 650 2 395 3 260 310 F G H JK Cumulative CF DCF Cumulative DCF Project B Cumulative CF DCF Cumulative DCF =D2/1.1^C2 =F2 -1100 =H2 =H2/1.1^C2 = 2 =E2+D3 =D3/1.1^C3 =G2+F3 250 =12+H3 =H3/1.1^C3 =K2+J3 =E3+D4 =D4/1.1^C4 =G3+F4 330 =13+H4 =H4/1.1^C4 =K3+J4 =E4+D5 =D5/1.1-C5 =G4+F5 410 =14+H5 HD/1.1^5 =K4+J5 =E5+D6 =D6/1.14C6 =G5+F6 760 =15+H6 =H6/1.1-C6 =K5+J6 Project A Payback =C4-E4/D5 Project A discounted Payback =C4-G4/F5 Project B Payback =C5-15/H6 Project A discounted Payback =C5-K5/16 17 Sheet1 Sheet6 Sheet4 Sheet2 Sheets Sheet3 Sheet7 Ready E ^ -- J ENG 6:54 AM + 100% 0