Quantitative Problem: Bellinger Industries is considering two projects for inclu

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 7%.

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

years

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

years

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

years

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

years

0 1 2 3 4 Project A -1,300 700 355 200 250 Project B -1,300 300 290 350 700

Explanation / Answer

Answer:

Project A:

Payback period=3 years+45/250=3.18 years

Discounted payback period=3 years+172.533/190.725

=3.9046 years

Project B:

Payback period=3 years+360/700=3.51 years

Discounted Payback period=3 years+480.659/534.03

=3.9000 years

Year P.V.F (7%) Project A Cumulative Project A Discounted cash flow Cumulative discounted 0 1 -1300 -1300 -1300 -1300 1 0.9345 700 -600 654.15 -645.85 2 0.8734 355 -245 310.057 -335.793 3 0.8163 200 -45 163.26 -172.533 4 0.7629 250 205 190.725 18.192

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