Question

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 11%.

	0		1		2		3		4
Project A	-1,100		650		350		230		280
Project B	-1,100		250		285		380		730

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

_______ years

_______ years

Answer 1

The solution is provided below:

Project A's payback=2+(1100-650-350)/230=2.4348 years

Project B's payback=3+(1100-250-285-380)/730=3.2534 years