Quantitative Problem: Bellinger Industries is considering two projects for inclu
ID: 2713291 • Letter: Q
Question
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 10%.
0
1
2
3
4
Project A
-1,500
700
415
240
290
Project B
-1,500
300
350
390
740
A ) What is Project A's payback? Round your answer to four decimal places. Do not round your intermediate calculations.
B) What is Project A's discounted payback? Round your answer to four decimal places. Do not round your intermediate calculations.
C,) What is Project B's payback? Round your answer to four decimal places. Do not round your intermediate calculations.
D.)What is Project B's discounted payback? Round your answer to four decimal places. Do not round your intermediate calculations.
0
1
2
3
4
Project A
-1,500
700
415
240
290
Project B
-1,500
300
350
390
740
Explanation / Answer
Project A
Project B
Year 0 Year 1 Year 2 Year 3 Year 4 Dec-15 Dec-16 Dec-17 Dec-18 Dec-19 Cash flows -1500 700 415 240 290 Discount Rate 10.0% PV of cash flows -1500 636.36 342.98 180.32 198.07 NPV -142 IRR -4.9% Profitability index = pv of fufuture cash flows/initial investment 0.905 Cumulative cash flows -1500 -800 -385 -145 145 cumulative discounted cashflows -1500 -863.64 -520.66 -340.35 -142.27 Payback period 3 years 6 months Dicounted payback period does not payback in 4 years