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%. 1 Project A -1,100 600 435 290 340 Project B -1,100 200 370 440 790 What is Project A's payback? Do not round intermediate calculations. Round your answer to four decimal places. years Show All Feedback What is Project A'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 pv @ 10% present value cumulative cash flows 0 $1,100 -$1,100 1 $1,100 $1,100 1 $600 -$500 0.9091 $545 -$555 2 $435 -$65 0.8264 $360 $195 $290 $225 0.7513 $218 $23 $340 $565 0.6830 $232 $255 Project A's payback = Project A's discounted payback = 2.2241 3.8945 years years 2+(65/290) 3+(195/218)

1 3 Project B: year cash flows cumulative cash flows pv @ 10% present value cumulative cash flows $1,100 -$1,100 1 -$1,100 -$1,100 $200 -$900 0.9091 $182 -$918 2 $370 -$530 0.8264 $306 -$612 $440 -$90 0.7513 $331 -$282 4 $790 $700 0.6830 $540 $258 Project B's payback = Project B's discounted payback = 3.1139 3.5222 years years 3+90/790) 3+(282/540)