Bellinger Industries is considering two projects for inclusion in its capital budget, and you have been...

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Finance

Bellinger Industries is considering two projects for inclusionin its capital budget, and you have been asked to do the analysis.Both projects' after-tax cash flows are shown on the time linebelow. Depreciation, salvage values, net operating working capitalrequirements, and tax effects are all included in these cash flows.Both projects have 4-year lives, and they have risk characteristicssimilar to the firm's average project. Bellinger's WACC is 8%.
0 1 2 3 4
Project A -1,000 600 365 290 340
Project B -1,000 200 300 440 790
a. What is Project A's payback? Round your answer to fourdecimal places. Do not round your intermediate calculations.

  years
b. What is Project A's discounted payback? Round your answer tofour decimal places. Do not round your intermediatecalculations.

  years
c. What is Project B's payback? Round your answer to fourdecimal places. Do not round your intermediate calculations.

  years
d. What is Project B's discounted payback? Round your answer tofour decimal places. Do not round your intermediatecalculations.

  years

Answer & Explanation Solved by verified expert

3.8 Ratings (550 Votes)

Project A

a.Payback period= full years until recovery + unrecovered cost at the start of the year/cash flow during the year

Payback period= 2 years + $35/ $290

= 2 years + 0.1207

= 2.1207 years.

b.Discounted Payback period= 2 years + $131.51/ $230.21

= 2 years + 0.5713

= 2.5713 years.

Project B

c.Payback period= 3 years + $60/ $790

= 3 years + 0.0759

= 3.0759 years.

d.Discounted Payback period= 3 years + $208.32/ $580.67

= 3 years + 0.3580

= 3.3580 years.

In case of any query, kindly comment on the solution

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Transcribed Image Text

Bellinger Industries is considering two projects for inclusionin its capital budget, and you have been asked to do the analysis.Both projects' after-tax cash flows are shown on the time linebelow. Depreciation, salvage values, net operating working capitalrequirements, and tax effects are all included in these cash flows.Both projects have 4-year lives, and they have risk characteristicssimilar to the firm's average project. Bellinger's WACC is 8%.01234Project A-1,000600365290340Project B-1,000200300440790a. What is Project A's payback? Round your answer to fourdecimal places. Do not round your intermediate calculations. yearsb. What is Project A's discounted payback? Round your answer tofour decimal places. Do not round your intermediatecalculations. yearsc. What is Project B's payback? Round your answer to fourdecimal places. Do not round your intermediate calculations. yearsd. What is Project B's discounted payback? Round your answer tofour decimal places. Do not round your intermediatecalculations. years