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 11%.

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

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

0 1 2 3 4 Project A -950 700 405 270 320 Project B -950 300 340 420 770

Explanation / Answer

Answer:

a)

The payback period = 1 year + 250/405 = 1.6173 years

b)

Discounted Payback period = 1 year + 319.37/328.7 = 1.9716 years

c)

Payback period = 2 years + 310/420 = 2.7381 years

d)

Discounted payback period = 3 years + 96.68/507.2 = 3.1946 years

Project A - Payback period Years cashflows Unrecovered initial outlay 0 -950 1 700 -250 (-950+700) 2 405 155 (-250+405) 3 270 4 320

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