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. $$\begin{array} { c r r r r r } \mathrm { r } = 10.25 \%\\\text { Year } &0 & 1 & 2 & 3 &{ 4 } \\\hline \mathrm { CF } _ { \mathrm { S } } &-\$ 950 & \$ 500 & \$ 800 & \$ 0 & \$ 0 \\\mathrm { CF } _ { \mathrm { L } } & -\$ 2,100 & \$ 400 & \$ 800 & \$ 800 & \$ 1,000\end{array}$$