**Please explain how to get the payback period. My calculations do not make sense. Thank you!**

ETMC invested $200,000 in a feasibility study for this expansion, and its executives are somewhat confident that there is a significant market for its expansion, but there is clearly risk involved. Given the lower level of fixed costs of Alternative A, you have determined that this project has 10% less risk than an average project for ETMC. In contrast, given the higher fixed costs of Alternative B, you have determined that it is 20% more risky than an average project for ETMC.

Currently, ETMCs capital structure is as follows:

Component	Description
Long-term Debt	$1000 par, 9% coupon bonds with 16 years until maturity. 10,000 bonds outstanding. Current market price of $1050.00. Your investment bankers estimate that, at your investors current required rate of return, new bonds could be sold at par minus 5% flotation costs.
Preferred Stock	$100 par, 11% dividend preferred stock, currently selling for $110.00. 16,000 shares outstanding. Your investment bankers estimate that ETMC could issue new preferred stock at par at your investors current required rate of return, but with a $2 per share discount and $3.75 per share flotation costs.
Common Stock	200,000 outstanding shares, with a book value of $46 per share and a $68.00 current market price per share. Dividend history shown below. Your investment bankers estimate that you could issue additional common stock shares with $2 per share underpricing and with flotation costs of $5.00 per share.

Year	Dividend
2020	$3.95
2019	$3.76
2018	$3.58
2017	$3.41
2016	$3.25

Currently, the rate of return for the stock market is 9.9%, and the risk-free rate is 4.7%. ETMCs corporate beta is 1.35.

ETMC is in the 24 percent tax bracket.

ETMC uses a 4-year decision rule for the payback period.

Investment

If ETMC does not expand, it can sell the proposed expansion site for $500,000.

Alternative A requires an additional plant, equipment, and technology of $2,200,000. The plant, equipment, and technology are classified as MACRS 5-year property. The useful life of the equipment, however, is 7 years; at the conclusion of the 7-year period, it is estimated that the salvage value will be $250,000.

Under Alternative A, inventories will increase by $140,000, accounts receivable will increase by $135,000, and accounts payable will increase by $80,000.

Alternative B requires an additional plant, equipment, and technology of $6,100,000. The plant, equipment, and technology are classified as MACRS 5-year property. The useful life of the equipment, however, is 7 years; at the conclusion of the 7-year period, it is estimated that the salvage value will be $360,000.

Under Alternative B, inventories will increase by $180,000, accounts receivable will increase by $150,000, and accounts payable will increase by $85,000.

Revenues and Expenses

The following chart shows the expected revenues and operating costs for each project for each year.

Alternative A

Alternative B

Year	Revenue	Operating Costs	Revenue	Operating Costs
2021	$1,100,000	$510,000	$1,700,000	$380,000
2022	$1,200,000	$530,000	$1,875,000	$390,000
2023	$1,300,000	$560,000	$1,975,000	$400,000
2024	$1,350,000	$570,000	$2,075,000	$410,000
2025	$1,250,000	$585,000	$2,150,000	$420,000
2026	$1,150,000	$595,000	$2,000,000	$420,000
2027	$1,050,000	$600,000	$1,800,000	$425,000

This is what I got

	Alternative A	Alternative B
2021	590,000
2022	670,000
2023	740,000
2024	780,000
Payback period	0.681654676