Question

Question 20 1 pts Yonan Inc. 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. WACC: 9.50% -$950 $500 $800 -$2,100 $400 $800 $800 $1,000 $63.57 567.35 $51.39 $77.47 570.74

Answer 1

rate positively ..

				Cumulative cash flow			Present value
	Year	CFs	CFL	CFs	CFL	PVIF @ 9.5%	PV S	PV L
	0	-950	-2100	-950	-2100	1	(950.00)	(2,100.00)
	1	500	400	-450	-1700	0.913242009	456.62	365.30
	2	800	800	350	-900	0.834010967	667.21	667.21
	3	0	800	350	-100	0.761653851	-	609.32
	4	0	1000	350	900	0.695574293	-	695.57
							173.83	237.40
Therefore Payback of project S will be lower as we can see cumulative cash flow is positive in early year.
Payback period for S =			1+450/800
			1.56
But based on present value project S has NPV of 173.83 while project L has higher NPV of 237.4
Therefore value lost = 237.4-173.83					63.57
ans =		63.57