Quantitative Problem: Bellinger Industries is considering two projects for inclu
ID: 2761218 • 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 8%. 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. What is Project B's 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.Explanation / Answer
Normal payback canbe found by findding cummulative casflow each year and then seeing where the cash flow gets positive:
For A payback period is 2nd year and for B it is 3rd year
Now discounted payback si found in similar way but taking into copnsideration the discount rate 8%. We will have to calculate the present value
The discounted payback period for A is 3rd year and for Bis fourth year
A B cumulative A cumulative B -1100 -1100 -1100 -1100 700 300 -400 -800 435 370 35 -430 240 340 275 -90 290 390 565 300