WACC and Capital Budgeting selection criterion. The payback is a "break-even calculation in the sense that if a project's Payback period was the earliest capital budgeting cash flows come in at the expected rate, the project will break even. The equation is: Number of Payback years prior to + full recovery Unrecovered cost at start of year Cash flow during full recovery year given equal The shorter a project's payback, the better the project is. However, payback has 3 main disadvantages: (1) All dollars received in different years are 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. Both methods provide information about liquidity A variant of the regular payback is the discounted payback. Unlike regular payback, the discounted payback considers capital v costs. However, the discounted payback still disregards cash flows beyond the payback year. In addition, there is no specific payback rule to justify project acceptance. 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 10% 0 2 3 4 000000 Project A -1,150 600 405 280 330 Project B -1,150 200 340 430 780 What is Project A's payback? Do not round intermediate calculations. Round your answer to four decimal places, years Hide Feedback