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

question 73

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.

• A) $24.14
• B) $26.82
• C) $29.80
• D) $33.11
• E) $36.42

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Definitions:

Absorption Costing

An accounting method that includes all manufacturing costs in the cost of a product, including fixed and variable costs.

Variable Costing

A costing method that includes only variable production costs (materials, labor, and overhead) in product costs.

Net Operating Income

This represents the total profit of a company after subtracting operating expenses, excluding taxes and interest.

Variable Costing

An accounting method that considers only variable costs as product costs, with fixed costs treated as period costs.