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 10%.
0 1 2 3 4
Project A -950 700 390 210 260
Project B -950 300 325 360
710
What is Project A's payback?
What is Project A's discounted payback?
What is Project B's payback?
What is Project B's discounted payback?

Answer & Explanation Solved by verified expert

3.8 Ratings (519 Votes)

Payback period is the time required for the operating cash inflows to recover the initial investment in a project For Project A Payback period calculation Here initial investment 950 Cumulative cash flows after year 1 700 Cumulative cash flows after year 2 700 390 1090 The cumulative cash flows reach the initial investment amount of 950 sometime in year 2 Therefore the payback period would be more than 1 years and less than 2 years Steps in the calculation of payback period are given below a Amount of cash flow in year 2 needed to reach 950 cumulative cash flows 950 700 year 1s cumulative cash flow amount 250 b Percentage of year 2 until cumulative amount of 950 is reached 250 390 06410 c Payback period 1 06410 16410 years Discounted payback period See Answer

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