Question

ellinger 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 10%.

	0		1		2		3		4
Project A	-950		650		430		280		330
Project B	-950		250		365		430		780

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

Answer 1

A B C D Year 1 1 Cash flow Cumulative cash flow 650 650 430 1080 280 1360 330 1690 4 Project A's payback period = 1 + ((950-650)/430) = 1.6977 years | Year 1 2 3 Cash flow 650 430 280 330 Discount factor 0.9091 0.8264 0.7513 0.6830 Discounted cash flow | Cumulative cash flow 590.9091 590.9091 355.3719 946.2810 210.3681 1156.6491 225.3944 1382.0436 Project A's discounted payback period = 2 + ((950 - 946.2810)/210.3681 = 2.0177 years. Year 250 2 Cash flow Cumulative cash flow 250 365 615 430 1045 780 1825 3 Project B's payback period = 2 + ((950-615)/430) = 2.7791 years

A B C D Year Cash flow 11 250 2 365 3 430 4 780 Discount factor 0.9091 0.8264 0.7513 0.6830 Discounted cash flow | Cumulative cash flow 227.2727 227.2727 301.6529 528.9256 323.0654 851.9910 532.7505 1384.7415 Project B's discounted payback period = 3+ ((950-851.9910)/532.7505) = 3.1840 years

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