Yonan Inc. is considering Projects S and L, whose cash flows are shown below. Th
ID: 2634163 • Letter: Y
Question
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: 8%
Year
0
1
2
3
4
CFS
-$1,100
$390
$390
$390
$390
CFL
-$2,200
$735
$735
$735
$735
$42.68
$40.12
$38.80
$36.44
$34.72
Year
0
1
2
3
4
CFS
-$1,100
$390
$390
$390
$390
CFL
-$2,200
$735
$735
$735
$735
Explanation / Answer
Alternative - 1 ar CFS CFL 0 1.00 ($1,100) ($1,100) ($2,200) ($2,200) 1 0.93 $390 $361 $735 $681 2 0.86 $390 $334 $735 $630 3 0.79 $390 $310 $735 $583 4 0.74 $390 $287 $735 $540 15.60% $192 12.70% $234 $42.68 IRR IRR Alternative - 2 differential NPV 0 1.00 ($1,100) -1100.0 1 0.93 $345 319.4 2 0.86 $345 295.8 3 0.79 $345 273.9 4 0.74 $345 253.6 42.684 ANSWER IS 42.68
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