The Basics of Capital Budgeting: Payback Period

Payback Period

Payback period was the earliest equation is:

$$ selection criterion. The $-$Selectis 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:

$$

Payback $=\{\begin{array}{ccc}\text{:}[& \text{N}\text{u}\text{m}\text{b}\text{e}\text{r}of& ]\\ & \text{f}\text{u}\text{l}\text{l}\text{r}\text{e}\text{c}\text{o}\text{v}\text{e}\text{r}\text{y}& \end{array}{?}_{\text{y}\text{e}\text{a}\text{r}\text{s}\text{p}\text{r}\text{i}\text{o}\text{r}to}+\frac{\text{U}\text{n}\text{r}\text{e}\text{c}\text{o}\text{v}\text{e}\text{r}\text{e}\text{d}costat\text{s}\text{t}\text{a}\text{r}\text{t}of\text{y}\text{e}\text{a}\text{r}}{\text{C}\text{a}\text{s}\text{h}\text{f}\text{l}\text{o}\text{w}\text{d}\text{u}\text{r}\text{i}\text{n}\text{g}\text{f}\text{u}\text{l}\text{l}\text{r}\text{e}\text{c}\text{o}\text{v}\text{e}\text{r}\text{y}\text{y}\text{e}\text{a}\text{r}}$

Number of

The $$ a project's payback, the better the project is$.$ However, payback has $3$ main disadvantages: $(1)$ All dollars received in different years are given $$ 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 $-$ Select$-$ and risk. year. In addition, there is no specific payback rule to justify project acceptance. Both methods provide information about $$ nd risk. Bellinger's WACC is $10\%.$

What is Project A$\text{'}$s payback? Round your answer to four decimal places. Do not round your intermediate calculations.

$$ years What is Project A$\text{'}$s discounted payback? Round your answer to four decimal places. Do not round your intermediate calculations.

$$ years What is Project B$\text{'}$s payback? Round your answer to four decimal places. Do not round your intermediate calculations.

$$ years What is Project B$\text{'}$s discounted payback? Round your answer to four decimal places. Do not round your intermediate calculations.

$$ years