Bellinger Industries is considering two projects for inclusion in its capital bu
ID: 2719487 • Letter: B
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 8%.
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
Explanation / Answer
Payback period project A
To compute payback period, we need to prepare a cumulative cash flow table:
year
CF
CCF
0
-1000
-1000
1
700
-300
2
425
125
3
240
365
4
290
655
Payback period = Last year of neg CCF + CF required in next year/ CF in the next year
= 1 + 300/425
= 1.71 years
Discounted Payback period project A
year
CF
PV Factor 8%
PV
CPV
0
-1000
1
-1000.00
-1000.00
1
700
0.925925926
648.15
-351.85
2
425
0.85733882
364.37
12.52
3
240
0.793832241
190.52
203.04
4
290
0.735029853
213.16
416.20
Discounted Payback period = Last year of neg CPV + PV required in next year/ PV in the next year
= 1 + 351.85/364.37
= 1.97 years
Payback period project B
year
CF
CCF
0
-1000
-1000
1
300
-700
2
360
-340
3
390
50
4
740
790
Payback period = Last year of neg CCF + CF required in next year/ CF in the next year
= 2 + 340/390
= 2.87 years
Discounted Payback period project B
year
CF
PV Factor 8%
PV
CPV
0
-1000
1
-1000.00
-1000.00
1
300
0.925925926
277.78
-722.22
2
360
0.85733882
308.64
-413.58
3
390
0.793832241
309.59
-103.99
4
740
0.735029853
543.92
439.94
Discounted Payback period = Last year of neg CPV + PV required in next year/ PV in the next year
= 3 + 103.99/543.92
= 3.19 years
year
CF
CCF
0
-1000
-1000
1
700
-300
2
425
125
3
240
365
4
290
655
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