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.

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 -1,450 700 445 290 340 Project B -1,450 300 380 440 790

Explanation / Answer

a. The payback period for project A is as shown below:

325

The payback period = last year negative cumulative cash flow + absolute cumulative cash flow that year/ Cash flow next year

The payback period of project A = 3 + 15/340 = 3.0441 years

b. The project A's discounted cash flow is as shown below:

Since the project takes more than 4 years to payback, the discounted payback period of project A is beyond its life of 4 years.

c. The payback period of project B is as follows:

Payback period of project B = 3 + 330/790 = 3.4177 years

d. The discounted payback period of project B is as shown below:

Again, the project B takes more than 4 years to payback, the discounted payback period is beyond its life of 4 years

Project A Year Cash flow Cumulative cash flow 0 -1450 -1450 1 700 -750 2 445 -305 3 290 -15 4 340

325

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