Quantitative Problem Bellinger Industries is considering two

Quantitative Problem: 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 9%.

0 1 2 3 4

Project A -1,300 700 380 280 330

Project B -1,300 300 315 430 780

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

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

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

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

Solution

Project A: Year Cash flow Cumulative CF 0 -1300 -1300 1 700 -600 2 380 -220 3 280 60 4 330 390 Payback period: 2 years + 60 /280 = 2.214 years Year Cash flows PVf @ 9% Present value Cumulative Cf 0 -1300 1 -1300 -1300 1 700 0.91743 642.202 -657.8 2 380 0.84168 319.838 -337.96 3 280 0.77218 216.211 -121.75 4 330 0.70843 233.78 112.032 Payback period-discounted: 3 years + 121.75/ 233.78= 3.52 years Project B Year Cash flow Cumulative CF 0 -1300 -1300 1 300 -600 2 315 -285 3 430 145 4 780 925 Payback period: 2 years + 285 /430 = 2.663 years Year Cash flows PVf @ 9% Present value Cumulative Cf 0 -1300 1 -1300 -1300 1 300 0.91743 275.229 -1024.8 2 315 0.84168 265.129 -759.64 3 430 0.77218 332.039 -427.6 4 780 0.70843 552.572 124.969 Payback period-discounted: 3 years + 427.6/552.57= 3.774 years