Homework SourseBellinger Industries is considering two projects for inclusi
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%.
What is Project A\'s 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.
| 0 | 1 | 2 | 3 | 4 | ||||||
| Project A | -1,300 | 700 | 380 | 280 | 330 | |||||
| Project B | -1,300 | 300 | 315 | 430 | 780 |
Solution
Payback of A = 1.0862
payback of B = 1.0961
| Discount rate | 9.0000% | ||
| Cash flows | Year | Discounted CF= cash flows/(1+rate)^year | Cumulative cash flow |
| (1,300.000) | 0 | (1,300.00) | (1,300.00) |
| 700.000 | 1 | 642.20 | (657.80) |
| 380.000 | 2 | 319.84 | (337.96) |
| 280.000 | 3 | 216.21 | (121.75) |
| 330.000 | 4 | 233.78 | 112.03 |
