Quantitative Problem: Bellinger Industries is considering two projects for inclu
ID: 2795950 • 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%. 415 210 260 Project A900700 Project B 900300 350 360 710 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 = ( Last Year with a Negative Cash Flow ) + [( Absolute Value of negative Cash Flow in that year)/ Total Cash Flow in the following year)]
Project A :
= 1 + (200 / 415)
= 1.4819 years
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Discounted Payback Period Project A=
( Last Year with a Negative Cumulative Cash Flow ) + [( Absolute Value of negative Cumulative Cash Flow in that year)/ Total Present Value of Cash Flow in the following year)]
= 1 + (215.85 / 355.80)
= 1.7079 years
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Project B:
= 2 + (250 /360)
= 2.6944 years
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Discounted Payback Period Project B=
( Last Year with a Negative Cumulative Cash Flow ) + [( Absolute Value of negative Cumulative Cash Flow in that year)/ Total Present Value of Cash Flow in the following year)]
= 3 + (36.37 / 521.87)
= 3.0697 Years
Year Investment Cash Inflow Net Cash Flow 0 -900 - -900 (Investment - Cash Inflow) 1 - 700 -200 (Net Cash Flow - Investment + Cash Inflow) 2 415 215 (Net Cash Flow + Cash Inflow) 3 210 425 (Net Cash Flow + Cash Inflow) 4 260 685 (Net Cash Flow + Cash Inflow)