Question

html?deploymentid=487052236589164567614011958 ISBN=97813054038028_id=606371559&snapshotid=14034178 CENGAGE MINDTAP Q Search this course ter 11 Blueprint Problems Capital Budgeting Decision Criteria: Payback Payback Payback was the earliest Select selection criterion. The select is a break-even calculation in the sense that if a project's cash flows come in at the expected rate, the project will break even. The equation is: Number of Payback t odo el of your years prior to tow y full recovery The Select a project's payback, the better the project is. However, payback has 3 main disadvantages: (1) Dollars received in different years are given Select weight. (2) Cash flows beyond the payback year are ignored. (3) The payback merely indicates when a project's Investment is recovered. There is no necessary relationship between a given payback and Investor wealth maximization A variant of the regular payback is the discounted payback. Unlike regular payback, the discounted payback considers Select costs. However, the discounted payback stil disregards cash flows Select the payback year. In addition, there is no specific payback rule to justify project acceptance. Both methods provide information about Select and risk. 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. Belinger's WACC IS Google Drive 700 Project A Project -1.450 - 1,450 What is Project A's payback? Round your answer to four decimal places. Do not round your intermediate calculations What is Project A's counted payback Round your answer to four decimal places. Do not round your intermediate calculations What is Project B's payback Round your answer to four decimal places. Do not round your intermediate calculations What is Project is discounted payback? Round your answer to four decimal places. Do not round your intermediate calculations LORRAINE 7800 JESS 8067 6 TANA DOU

Answer 1

Payback period: Payback period is the period in which initial investment is recovered.

Project A:

Year	Opening Bal	CF	Clsoing Bal
1	1450	700	750
2	750	395	355
3	355	280	75
4	75	330	-255

PBP = Year in which least +ve CB + [ CB in that Year / CF of Next Year ]

= 3 + [ 75 / 330 ]

= 3 + 0.23

= 3.23 Years

Project B:

Year	Opening Bal	CF	Clsoing Bal
1	1450	300	1150
2	1150	330	820
3	820	430	390
4	390	780	-390

PBP = Year in which least +ve CB + [ CB in that Year / CF of Next Year ]

= 3 + [ 390 / 780 ]

= 3 + 0.50

= 3.50 Years

Discounted Payback period: Discounted payback period is the period in which inital investment is recovered after considering the time value of money.

Project A:

Year	Opening Bal	CF	PVF @8%	Disc CF	Clsoing Bal
1	$ 1,450.00	$ 700.00	0.9259	$ 648.15	$    801.85
2	$    801.85	$ 395.00	0.8573	$ 338.65	$    463.20
3	$    463.20	$ 280.00	0.7938	$ 222.27	$    240.93
4	$    240.93	$ 330.00	0.7350	$ 242.56	$       -1.63

Disc PBP = Year in which least +ve CB + [ CB in that Year / Disc CF of Next Year ]

= 3 + [ 240.93 / 242.56 ]

= 3 + 0.99

= 3.99 Years

Project B:

Year	Opening Bal	CF	PVF @8%	Disc CF	Clsoing Bal
1	$ 1,450.00	$ 300.00	0.9259	$ 277.78	$ 1,172.22
2	$ 1,172.22	$ 330.00	0.8573	$ 282.92	$    889.30
3	$    889.30	$ 430.00	0.7938	$ 341.35	$    547.95
4	$    547.95	$ 780.00	0.7350	$ 573.32	$     -25.37

Disc PBP = Year in which least +ve CB + [ CB in that Year / Disc CF of Next Year ]

= 3 + [ 547.95 / 573.32 ]

= 3 + 0.96

= 3.96 Years