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		650		365		260		310
Project B	-900		250		300		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
Year	Cash flow stream	Cumulative cash flow
0	-900	-900
1	650	-250
2	365	115
3	260	375
4	310	685
Payback period is the time by which undiscounted cashflow cover the intial investment outlay
this is happening between year 1 and 2
therefore by interpolation payback period = 1 + (0-(-250))/(115-(-250))
1.6849 Years
Project A
Year	Cash flow stream	Cumulative cash flow
0	-900	-900
1	650	-250
2	365	115
3	260	375
4	31000.00%	685
Discounted payback period is the time by which discounted cashflow cover the intial investment outlay
this is happening between year 2 and 3
therefore by interpolation payback period = 2 + (0-(-28.67))/(156.4-(-28.67))
2.1549 Years
Where
Discounting factor =(1 + discount rate)^(corresponding year)
Discounted Cashflow=Cash flow stream/discounting factor

Project B
Year	Cash flow stream	Cumulative cash flow
0	-900	-900
1	250	-650
2	300	-350
3	410	60
4	760	820
Payback period is the time by which undiscounted cashflow cover the intial investment outlay
this is happening between year 2 and 3
therefore by interpolation payback period = 2 + (0-(-350))/(60-(-350))
2.8537 Years
Project B
Year	Cash flow stream	Cumulative cash flow
0	-900	-900
1	250	-650
2	300	-350
3	410	60
4	76000.00%	820
Discounted payback period is the time by which discounted cashflow cover the intial investment outlay
this is happening between year 3 and 4
therefore by interpolation payback period = 3 + (0-(-145.8))/(337.2-(-145.8))
3.3019 Years
Where
Discounting factor =(1 + discount rate)^(corresponding year)
Discounted Cashflow=Cash flow stream/discounting factor