Quantitative Problem: Bellinger Industries is considering two projects for inclu
ID: 2786778 • 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 7%.
0 1 2 3 4
Project A -950 600 450 250 300
Project B -950 200 385 400 750
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
Explanation / Answer
Project A:
Payback Period : Years of Full recovery + Unrecovered Cost at the begining of the year / Cash Flow during the year
= 1 + 350/450 = 1.78 years
Discounted Payback Period = Years of Full recovery + Unrecovered Cost at the begining of the year / Cash Flow during the year
{Note here we will use Discounted Cash Flows}
= 1 + 359.26 / 393.04 = 1.91 years
Project B:
Payback Period : Years of Full recovery + Unrecovered Cost at the begining of the year / Cash Flow during the year
= 2 + 365/400 = 2.91 years
Discounted Payback Period = Years of Full recovery + Unrecovered Cost at the begining of the year / Cash Flow during the year
{Note here we will use Discounted Cash Flows}
= 3 + 100.3 / 572.17 = 3.18 years
Year 0 1 2 3 4 Cash Flow -950 600 450 250 300 Cumulative Cash Flow 600 1050 1300 1600 Discounted Cash Flow 560.74 393.04 204.07 228.87 Cumulative Discounted Cash Flow 590.74 953.78 1157.84 1386.72