Payback period was the earliest capital budgeting The equation is: selection criterion. The payback 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. Number of The shorter Unrecovered cost at start of year Payback = years prior to + Cash flow during full recovery year full recovery weight. (2) Cash flows beyond the payback year the a project's payback, the better the project is. However, payback has 3 main disadvantages: (1) All dollars received in different years are given equal 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 capital costs. However, the discounted payback still disregards cash flows beyond payback year. In addition, there is no specific payback rule to justify project acceptance. Both methods provide information about liquidity 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 11%. 0 1 2 3 4 + Project A Project B -950 700 350 220 270 -950 300 285 370 720 What is Project A's payback? Do not round intermediate calculations. Round your answer to four decimal places. 1.7143 years Show All Feedback What is Project A's discounted payback? Do not round intermediate calculations. Round your answer to four decimal places. years 2.2195 Show All Feedback What is Project B's payback? Do not round intermediate calculations. Round your answer to four decimal places. 2.4138 years Show All Feedback What is Project B's discounted payback? Do not round intermediate calculations. Round your answer to four decimal places. 3.3750 years