Quantitative Problem: Bellinger Industries is considering two projects for inclu
ID: 2782999 • 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 9%. Project A 1,100 Project B 1,100 500 200 440 375 220 370 270 720 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. yearsExplanation / Answer
Payback period is the time taken to recover the initial investment.
Discounted payback is the time taken to recover the initial investment after discounting the amounts.
Now, Payback of Poject A.
Initial investment = $ 1,100
Payback is time taken to recover $1,100. Which is as follows.
We recover $600 in 1st year and $ 440 in 2nd year, so amount recovered in 2 years = $1,040
$ 60 is recovered in part of 3rd, which is arrived by = 60 * (1/220) = 0.2727 year
Total Payback period = 2.2727
Discounted Payback period - Now, by discounting the values of inflows we get discounted payback
Year 1 $ 600 After discounting @ 9% is 550.46
Year 2 $ 440 after discounting @ 9% is 370.34
Year 3 $ 220 after discounting @ 9% is 169.88
Year 4 $ 270 after discounting @ 9% is 191.27
Discounted payback = 3.0487
Payback of Project B.
Initial investment = $ 1,100
Payback is time taken to recover $1,100. Which is as follows.
We recover $200 in 1st year and $ 375 in 2nd year and $370 in 3rd year, so amount recovered in 3 years = $945
$ 155 is recovered in part of 4th, which is arrived by = 155 * (1/720) = 0.21527 year
Total Payback period = 3.2152
Discounted Payback period - Now, by discounting the values of inflows we get discounted payback
Year 1 $ 200 After discounting @ 9% is 183.49
Year 2 $ 375 after discounting @ 9% is 315.63
Year 3 $ 370 after discounting @ 9% is 285.71
Year 4 $ 720 after discounting @ 9% is 510.07
Discounted payback = 3.6179