Capital Budgeting Decision Criteria: Payback\ Payback was the earliest selection criterion. The is a "break-even" calculation in the sense that if a project's cash flows come in at the expected ra the project will break even. The equation is:\

Payback ={(:[ Number of ]),( years prior to ),( full recovery ):}+( Unrecovered cost at start of year )/( Cash flow during full recovery year )

\ The a project's payback, the better the project is. However, payback has 3 main disadvantages: (1) Dollars received in different years are given weight. (2) Ca. flows beyond the payback year are ignored. (3) The payback merely indicates when a project's investment is recovered. There is no necessary relationship between a given payback an investor wealth maximization.\ A variant of the regular payback is the discounted payback. Unlike regular payback, the discounted payback considers capital

costs. However, the discounted payback still disregards cash flows the paybal:k year. In addition, there is no specific payback rule to justify project acceptance. Both methods provide information about 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

7%

.\ \\\\table[[,0,1,2,3,4],[Project A,

-1,300

,700,350,280,330],[Project B,

-1,300

,300,285,430,780]]\ What is Project A's payback? Round your answer to four decimal places. Do not round intermediate calculations. years\ What is Project A's discounted payback? Round your answer to four decimal places. Do not round intermediate calculations. years

Capital Budgeting Decision Criteria: Payback Payback was the earliest selection criterion. The is a "break-even" calculation in the sense that if a project's cash flows come in at the expected r the project will break even. The equation is: Payback=Numberofyearspriortofullrecovery+CashflowduringfullrecoveryyearUnrecoveredcostatstartofyear The a project's payback, the better the project is. However, payback has 3 main disadvantages: (1) Dollars received in different years are given weight. (2) Ca investor wealth maximization. A variant of the regular payback is the discounted payback. Unlike regular payback, the discounted payback considers costs. However, the discounted payback still disregards cash flows the paybajek year. In addition, there is no specific payback rule to justify project acceptance. Both methods provide information about and risk. lives. and they have risk characteristics similar to the firm's average project. Bellinger's WACC is 7%. What is Project A's payback? Round your answer to four decimal places. Do not round intermediate calculations. years What is Project A's discounted payback? Round your answer to four decimal places. Do not round intermediate calculations. years