Bellinger Industries is considering two projects for inclusion in its capital bu
ID: 2766782 • 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 11%.
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 discounted payback? Round your answer to four decimal places. Do not round your intermediate calculations.
years
Explanation / Answer
Formula: Discounted Payback Period (DPP) = A + (B / C)
Where, A - Last period with a negative discounted cumulative cash flow
B - Absolute value of discounted cumulative cash flow at the end of the period A
C - Discounted cash flow during the period after A.
For PROJECT (A):
YEAR
CASH FLOW (CF)
PV FACTOR
DISCOUNTED CASH FLOW
CUMULATVE DISCOUNTED CASH FLOW (CCF)
0
-1450
1.000
-1450
-1450
1
700
0.901
630.6306306
-819.3693694
2
445
0.812
361.1719828
-458.1973866
3
290
0.731
212.0455006
-246.151886
4
340
0.659
223.9685312
-22.18335479
For PROJECT (B):
YEAR
CASH FLOW (CF)
PV FACTOR
DISCOUNTED CASH FLOW
CUMULATVE DISCOUNTED CASH FLOW (CCF)
0
-1450
1.000
-1450
-1450
1
300
0.901
270.2702703
-1179.72973
2
380
0.812
308.4165246
-871.3132051
3
440
0.731
321.7242078
-549.5889973
4
790
0.659
520.3974696
-29.19152775
Discounted payback period gives the number of years it takes to break even
from undertaking the initial expenditure
But in the given question, both the projects did not give even break even
return till the end of 4 years.
YEAR
CASH FLOW (CF)
PV FACTOR
DISCOUNTED CASH FLOW
CUMULATVE DISCOUNTED CASH FLOW (CCF)
0
-1450
1.000
-1450
-1450
1
700
0.901
630.6306306
-819.3693694
2
445
0.812
361.1719828
-458.1973866
3
290
0.731
212.0455006
-246.151886
4
340
0.659
223.9685312
-22.18335479
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