Payback period was the earliest

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selection criterion. The

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is a "break-even" calculation in the sense that if a project's cash flows come in at the expected rate, the project will break even. The equation is:

The

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a project's payback, the better the project is. However, payback has 3 main disadvantages: (1) All dollars received in different years are given

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weight. (2) Cash flows beyond the payback year are ignored. (3) The payback merely indicates when a project's investment will be recovered. There is no necessary relationship between a given payback and investor wealth maximization.

A variant of the regular payback is the discounted payback. Unlike regular payback, the discounted payback considers

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costs. However, the discounted payback still disregards cash flows

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the payback year. In addition, there is no specific payback rule to justify project acceptance. Both methods provide information about

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and risk.

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 8%.

0 1 2 3 4

Project A -1,000 650 395 240 290

Project B -1,000 250 330 390 740

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. Round your answer to four decimal places.

years

Tools AY La regnored (J) The payback merely indicates when a projects investment will be recovered. There is no necessary tattoo given payback and investor wealth maximization A variant of the regular payback is the discounted payback. Unlike regular payback, the discounted payback considerate costs However, the debuted hack til disregards cash flows beyond the payback year. In addition, there is no speche payback rule to justify project acceptance. Both methods are information about liquidity and risk Quantitative Problemi Bellinger Industries is considering two projects for indusion in capital tudot, and you have been asked to do the analysis foretrach flows are shown on the time line below. Depreciation, salvage values, net operating working capital requirements, and tax effects are included in these and other have 4-year lives, and they have risk characteristics similar to the firm's average project. Helinger's WACCIO 0 Tips Tips ou Essay Project 1,000 395 240 290 Project -1.000 250 330 740 What is Project A's payback? Do not round intermediate calculations. Round your answer to four decal places years What is Project A's discounted payback Do not round Intermediate calculation Round your answer to four deciso Years What is Project 's payback? Do not found intermediate calculations. Hound your answer to four decimal places What is Project's discounted payback? Do not round intermediate calculations. Round your wer to tour de ces C Save & Continue