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

Question

Quantitative Problem: 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 10%. 0 1 2 3 4 -950 600 440 270 320 Project A Project B -950 200 375 420 770 What is Project A's payback? Do not round intermediate calculations. Round your answer to four decimal places. years What is Project A's discounted payback? Do not round intermediate calculations. Round your answer to four decimal places. years What is Project B's payback? Do not round intermediate calculations. Round your answer to four decimal places. years What is Project B's discounted payback? Do not round intermediate calculations.

Help In Homework · Accepted Answer

0 1 2 3 4 Project A -950 600 440 270 320 Project B -950 200 375 420 770 Payback for Project A Year 1 = 600 Year 2 = 440 Total = 600 + 440 = 1040 Requirement from Year 2 = 950 - 600 = 350 Share of Year 2 = 350 / 440 = 0.7954545455 Payback for Project A = 1 (Year 1 cashflow) + 0.7955 (Share of Year 2) Payback for Project A = 1 + 0.7955 Payback for Project A = 1.7955 year Year Project A Cashflow Discount factor Project A Cashflow * Discount factor Cumulative discounted cashflows 1 600 1/(1+r)^1 1/(1+10%)^1 1/1.1^1 =0.909091 545.4545 545.45455 2 440 1/(1+r)^2 1/(1+10%)^2 1/1.1^2 =0.826446 363.6364 909.09091 3 270 1/(1+r)^3 1/(1+10%)^3 1/1.1^3 =0.751315 202.855 1111.9459 4 320 1/(1+r)^4 1/(1+10%)^4 1/1.1^4 =0.683013 218.5643 Discounted Payback for Project A Year 1 = 545.45455 Year 2 = 363.6364 Total = 545.45455 + 363.6364 = 909.09091 Year 3 = 202.855 Total = 909.09091 + 202.855 = 1111.9459 Requirement from Year 3 = 950 - 909.09091 = 40.90909 Share of Year 3 = 40.90909 / 202.855 = 0.201666667 Discounted Payback for Project A = 1 (Year 1 cashflow) + 1 (Year 2 cashflow) + 0.2017 (Share of Year 3) Discounted Payback for Project A = 1 + 1 + 0.2017 Discounted Payback for Project A = 2.2017 years Payback for Project B Year 1 = 200 Year 2 = 375 Total = 200 + 375 = 575 Year 3 = 420 Total = 575 + 420 = 995 Requirement from Year 3 = 950 - 575 = 375 Share of Year 3 = 375 / 420 = 0.8928571429 Payback for Project B = 1 (Year 1 cashflow) + 1 (Year 2 cashflow) + 0.8929 (Share of Year 3) Payback

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Quantitative Problem: Bellinger Industries is considering two projects for inclusion in its capital budget, and you have been asked to do the analysis

Expert Solution

Archived Solution

0	1	2	3	4
Project A	-950	600	440	270	320
Project B	-950	200	375	420	770

Year	Project A Cashflow	Discount factor	*Project A Cashflow Discount factor**	Cumulative discounted cashflows
1	600	1/(1+r)^1	1/(1+10%)^1	1/1.1^1	=0.909091	545.4545	545.45455
2	440	1/(1+r)^2	1/(1+10%)^2	1/1.1^2	=0.826446	363.6364	909.09091
3	270	1/(1+r)^3	1/(1+10%)^3	1/1.1^3	=0.751315	202.855	1111.9459
4	320	1/(1+r)^4	1/(1+10%)^4	1/1.1^4	=0.683013	218.5643