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Langton Inc
Langton 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 discounted payback, some value may be forgone. How much value will be lost in this instance? WACC 5.25% 0 Year Project S CF Project L CF $930.00 $2,050.00 1 $600.00 $400.00 2 $700.00 $600.00 3 $100.00 $700.00 4 $50.00 $1,200.00 Projects Discounted CF Cumulative Discounted CF Discounted Paybacks NPVS Project L Discounted CF Cumulative Discounted CF Discounted Payback, NPVL Value Lost
Expert Solution
| Year | 0 | 1 | 2 | 3 | 4 |
| PVF @ 5.25% (1 / (1.0525)n) | 1 | 0.95012 | 0.90273 | 0.85770 | 0.81491 |
| Project S | |||||
| CF | -930 | 600 | 700 | 100 | 50 |
| Discounted CF (CF* PVF) | -930 | 570.0713 | 631.9080 | 85.7697 | 40.7457 |
| Cumulative discounted CF | -930 | -359.9287 | 271.9792 | 357.7489 | 398.4946 |
| Discounted Payback Period# | ( 1 + 359.9287 / 631.9080) | ||||
| 1.570 | |||||
| NPVS | (Sum Of discounted CF) | ||||
| 398.4946 | |||||
| Project L | |||||
| CF | -2050 | 400 | 600 | 700 | 1200 |
| Discounted CF (CF * PVF) | -2050 | 380.0475 | 541.6354 | 600.3876 | 977.8964 |
| Cumulative discounted CF | -2050 | -1669.9525 | -1128.3171 | -527.9295 | 449.9669 |
| Discounted Payback Period | (2 + 527.9295 / 977.8964) | ||||
| 2.540 | |||||
| NPVL | 449.9669 | ||||
| Value Lost (NPVL - NPVS) | 51.4723 |
#Discounted Payback Period = LY + Cumulative Discounted CF (LY) / Discounted CF(HY)
If we accept the project by lower discounted payback criteria then we select project S which leads to loss in value of $51.4723
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