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 11.75%

	0	1	2	3	4
CFs	-950	500	800	0	0
CFL	-2100	400	800	800	1000

a $29.51

b $28.01

c $ 26.76

d $25.01

e $0.00

Answer 1

Solution:-
	Calculation of value to be lost
	WACC=	11.75%
	NPV of project "S"
	Years	Cash flow(CF)	PVF @11.75%	PV=CF*PVF
	0	-950	1.00000	-950.00000
	1	500	0.89485	447.42729
	2	800	0.80076	640.61178
	3	0	0.71657	0.00000
	4	0	0.64122	0.00000
	NPV of project "S"			138.03908
	NPV of project "L"
	Years	Cash Flow	[email protected]%	PV=CF*PVF
	0	-2100	1.00000	-2100.00000
	1	400	0.89485	357.94183
	2	800	0.80076	640.61178
	3	800	0.71657	573.25439
	4	1000	0.64122	641.22415
	NPV of project "L"			113.03217
	Note:- Value lost or gained can be calculated by the difference in NPV of the project
	If the decision is made by choosing the project with shorter payback no value will be lost by this decision. To the contrary the value will be gained by 25.01(138.04-113.03=25.01)
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