#6 Blueprint

6. The Basics of Capital Budgeting: Payback Paybuck period was the earliest selection criterion. The is a "oreak-even' calculation in the sense that it a project's cash flows come in at the expected rste, the project war break even. The equation is: NumberofPayback=yearspriortofullrecovery The -letpit a a project's payback, the better the project is. However, payback has 3 main disadvantages: (1) All dollars received in different years are given (2) Cash flows beyond the payback year are ignored. (3) The payback merely indicates when a project's investment will be recavered. There is no necessary relationship between a given payback and imeiter wealth maximiration. A varlant of the regular payback is the discounted payback. Unibe regular paybsck, the discounted payback considers costs. However, the discounted payback still disregards cash flows the payback year. In addition, there is no specific parback rule to fustify project acceptance. Both methods provide information about and risk. Quantitative Problem: Bellinger Industries is considering two projects for inctusion in its captal budget, and vou have been asked to do the analysis, Both projects' after-tax cash flows are shown on the time line below. Depreclation, 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 11%. What is Project A's parback? Do not round intermeciate Aiculations. Round your answer to four decimal places. years What is Project A's dscounted parback? Do not round intermediate calculations. Round your answer to four decimai places. years What is Project B's payback? Do not round intermediate calculations. Round your answer to four decimal places. vears What is Project B's dscounted payback? Do not round intermediate calculations. Round your answer to four decimal places. years