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

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Finance

Quantitative Problem: Bellinger Industries isconsidering two projects for inclusion in its capital budget, andyou have been asked to do the analysis. Both projects' after-taxcash flows are shown on the time line below. Depreciation, salvagevalues, net operating working capital requirements, and tax effectsare all included in these cash flows. Both projects have 4-yearlives, and they have risk characteristics similar to the firm'saverage project. Bellinger's WACC is 12%.

01234
Project A-1,200650415290340
Project B-1,200250350440790

What is Project A's payback? Round your answer to four decimalplaces. Do not round your intermediate calculations.

years

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

years

What is Project B's payback? Round your answer to four decimalplaces. Do not round your intermediate calculations.

years

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
3.7 Ratings (591 Votes)

Payback period Project A Project B
Time Amount Cumulative Amount Cumulative
                                                                      -              (1,200.00)          (1,200.00)          (1,200.00)          (1,200.00)
                                                                 1.00                  650.00             (550.00)                250.00             (950.00)
                                                                 2.00                  415.00             (135.00)                350.00             (600.00)
                                                                 3.00                  290.00                155.00                440.00             (160.00)
                                                                 4.00                  340.00                495.00                790.00                630.00
Payback period 2 + 135/290 3 + 160/790
Payback period 2.4655 Years 3.2025 Years
Discounted PBP Project A
Time Amount PVf at 12% PV Cumulative
                                                                      -              (1,200.00)                1.0000          (1,200.00)          (1,200.00)
                                                                 1.00                  650.00                0.8929                580.36             (619.64)
                                                                 2.00                  415.00                0.7972                330.84             (288.81)
                                                                 3.00                  290.00                0.7118                206.42                (82.39)
                                                                 4.00                  340.00                0.6355                216.08                133.69
Discounted PBP = 3 + 82.39/216.08
Discounted PBP = 3 + .3813 Years
Discounted PBP = 3.3813 Years
Discounted PBP Project B
Time Amount PVf at 12% PV Cumulative
                                                                      -              (1,200.00)                1.0000          (1,200.00)          (1,200.00)
                                                                 1.00                  250.00                0.8929                223.21             (976.79)
                                                                 2.00                  350.00                0.7972                279.02             (697.77)
                                                                 3.00                  440.00                0.7118                313.18             (384.58)
                                                                 4.00                  790.00                0.6355                502.06                117.47
Discounted PBP = 3 + 384.58/502.06
Discounted PBP = 3 + .766 Years
Discounted PBP = 3.7660 Years

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Transcribed Image Text

Quantitative Problem: Bellinger Industries isconsidering two projects for inclusion in its capital budget, andyou have been asked to do the analysis. Both projects' after-taxcash flows are shown on the time line below. Depreciation, salvagevalues, net operating working capital requirements, and tax effectsare all included in these cash flows. Both projects have 4-yearlives, and they have risk characteristics similar to the firm'saverage project. Bellinger's WACC is 12%.01234Project A-1,200650415290340Project B-1,200250350440790What is Project A's payback? Round your answer to four decimalplaces. Do not round your intermediate calculations.yearsWhat is Project A's discounted payback? Round your answer tofour decimal places. Do not round your intermediatecalculations.yearsWhat is Project B's payback? Round your answer to four decimalplaces. Do not round your intermediate calculations.yearsWhat is Project B's discounted payback? Round your answer tofour decimal places. Do not round your intermediatecalculations.years

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