Farmer CoIs Considering Projects S and L, Whose Cash Flows Are

question 48

Multiple Choice

Farmer Co.is considering Projects S and L, whose cash flows are shown below.These projects are mutually exclusive, equally risky, and not repeatable.If the decision is made by choosing the project with the shorter payback, some value may be forgone.How much value will be lost in this instance? Note that under some conditions choosing projects on the basis of the shorter payback will not cause value to be lost. $$\begin{array} { c r r r r r } \mathrm { r } = 10.25 \%\\\text { Year } &0 & 1 & 2 & 3 &{ 4 } \\\hline \mathrm { CF } _ { \mathrm { S } } &-\$ 950 & \$ 500 & \$ 800 & \$ 0 & \$ 0 \\\mathrm { CF } _ { \mathrm { L } } & -\$ 2,100 & \$ 400 & \$ 800 & \$ 800 & \$ 1,000\end{array}$$

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Definitions:

Process Costing

A costing method used for homogeneous products, where costs are accumulated for a continuous process and then assigned to units of output.

Weighted-Average Method

An inventory valuation method that calculates the cost of goods sold and ending inventory based on the average cost of all similar items in inventory.

Equivalent Units of Production

A concept in cost accounting used to allocate production costs to units produced, accounting for partially completed units by converting them into an equivalent number of fully completed units.

Conversion Costs

The combined costs of direct labor and manufacturing overhead involved in converting raw materials into finished products.