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 7%.

	0		1		2		3		4
Project A	-950		600		450		250		300
Project B	-950		200		385		400		750

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

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

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

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

Please Help!!Thank you.

Answer 1

1
Project A
Year	Cash flow stream	Cumulative cash flow
0	-950	-950
1	600	-350
2	450	100
3	250	350
4	300	650
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-(-350))/(100-(-350))
1.7778 Years
2
Project A
Year	Cash flow stream	Cumulative cash flow
0	-950	-950
1	600	-350
2	450	100
3	250	350
4	300	650
Discounted payback period is the time by which discounted cashflow cover the intial investment outlay
this is happening between year 1 and 2
therefore by interpolation payback period = 1 + (0-(-389.25))/(3.8-(-389.25))
1.9903 Years
Where
Discounting factor =(1 + discount rate)^(corresponding year)
Discounted Cashflow=Cash flow stream/discounting factor

3
Project B
Year	Cash flow stream	Cumulative cash flow
0	-950	-950
1	200	-750
2	385	-365
3	400	35
4	750	785
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-(-365))/(35-(-365))
2.9125 Years
4
Project B
Year	Cash flow stream	Cumulative cash flow
0	-950	-950
1	200	-750
2	385	-365
3	400	35
4	750	785
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-(-100.29))/(471.88-(-100.29))
3.1753 Years
Where
Discounting factor =(1 + discount rate)^(corresponding year)
Discounted Cashflow=Cash flow stream/discounting factor