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 9%.

	0		1		2		3		4
Project A	-1,300		700		380		280		330
Project B	-1,300		300		315		430		780

What is Project A's payback? Round your answer to four decimal places. Do not round intermediate calculations.

What is Project B's payback? Round your answer to four decimal places. Do not round intermediate calculations.

Answer 1

Discount rate	9.0000%
Cash flows	Year	Discounted CF= cash flows/(1+rate)^year	Cumulative cash flow
(1,300.000)	0	(1,300.00)	(1,300.00)
700.000	1	642.20	(657.80)
380.000	2	319.84	(337.96)
280.000	3	216.21	(121.75)
330.000	4	233.78	112.03

Payback of A = 1.0862

Discount rate	9.0000%
Cash flows	Year	Discounted CF= cash flows/(1+rate)^year	Cumulative cash flow
(1,300.000)	0	(1,300.00)	(1,300.00)
300.000	1	275.23	(1,024.77)
315.000	2	265.13	(759.64)
430.000	3	332.04	(427.60)
780.000	4	552.57	124.97

payback of B = 1.0961