Question
15. The replacement chain approach - Evaluating projects with unequal lives Evaluating projects with unequal lives Tasty Tuna Corporation is a U.S. firm that wants
15. The replacement chain approach - Evaluating projects with unequal lives
Evaluating projects with unequal lives
Tasty Tuna Corporation is a U.S. firm that wants to expand its business internationally. It is considering potential projects in both Germany and Mexico, and the German project is expected to take six years, whereas the Mexican project is expected to take only three years. However, the firm plans to repeat the Mexican project after three years. These projects are mutually exclusive, so Tasty Tuna Corporations CFO plans to use the replacement chain approach to analyze both projects. The expected cash flows for both projects follow:
| Project: | German |
|---|---|
| Year 0: | $975,000 |
| Year 1: | $350,000 |
| Year 2: | $370,000 |
| Year 3: | $390,000 |
| Year 4: | $320,000 |
| Year 5: | $115,000 |
| Year 6: | $80,000 |
| Project: | Mexican |
|---|---|
| Year 0: | $475,000 |
| Year 1: | $225,000 |
| Year 2: | $235,000 |
| Year 3: | $255,000 |
If Tasty Tuna Corporations cost of capital is 11%, what is the NPV of the German project?
$259,972
$247,592
$210,453
$198,074
Assuming that the Mexican projects cost and annual cash inflows do not change when the project is repeated in three years and that the cost of capital will remain at 11%, what is the NPV of the Mexican project, using the replacement chain approach?
$208,818
$181,581
$172,502
$163,423
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Foundations Of Financial Markets And Institutions
Authors: Frank J Fabozzi, Franco G Modigliani, Frank J Jones
4th Edition
0136135315, 978-0136135319
