Bellinger Industries is considering two projects for inclusion in its capital bu

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 10%.

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

years

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

years

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

years

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

years

0 1 2 3 4 Project A -1,100 650 435 270 320 Project B -1,100 250 370 420 770

Explanation / Answer

a. Project A's payback           2.0556 Years Working: Payback period is the time upto which initial cost is recovered back. Year Cash flows Cumulative Cash flows 0 $      -1,100 $       -1,100 1 650 -450 2 435 -15 3 270 255 4 320 575 Total $           575 Payback Period = 2+(15/270) =           2.0556 Years b. Project A's discounted payback           2.7389 Years Working: Year Cash flows Discount factor Present Value Cumulative Present Value 0 $      -1,100             1.000 $       -1,100 $   -1,100 1 650             0.909 $            591 $      -509 2 435             0.826 $            360 $      -150 3 270             0.751 $            203 $          53 4 320             0.683 $            219 $        272 Total $            272 Discounted Payback = 2+(150/203) =           2.7389 Years c.. Project B's payback           3.0779 Years Working: Payback period is the time upto which initial cost is recovered back. Year Cash flows Cumulative Cash flows 0 $      -1,100 $       -1,100 1 250 -850 2 370 -480 3 420 -60 4 770 710 Total $           710 Payback Period = 3+(60/770) =           3.0779 Years b. Project A's discounted payback           3.4772 Years Working: Year Cash flows Discount factor Present Value Cumulative Present Value 0 $      -1,100             1.000 $       -1,100 $   -1,100 1 250             0.909 $            227 $      -873 2 370             0.826 $            306 $      -567 3 420             0.751 $            316 $      -251 4 770             0.683 $            526 $        275 Total $            275 Discounted Payback = 3+(251/526) =           3.4772 Years

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