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.

Question

Quizplus · Accepted Answer

11ea1b84_8bb5_29d9_a54a_83a23a681706_TB3581_00 
 11ea1b84_8bb5_29da_a54a_d98f00286a09_TB3581_00 
 11ea1b84_8bb5_50eb_a54a_354aad84bef3_TB3581_00 
 11ea1b84_8bb5_50ec_a54a_7d103b710c82_TB3581_00 Note that the WACC is not constrained to be less than the crossover rate.So, there may not be a conflict between NPV and payback; hence following the IRR rule may not result in a loss of value, so the correct answer may be $0.00.

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