Question
Evaluating projects with unequal lives Cold Duck Manufacturing is a U.S. firm that wants to expand its business internationally. It is considering potential projects in
Evaluating projects with unequal lives
Cold Duck Manufacturing is a U.S. firm that wants to expand its business internationally. It is considering potential projects in both Italy and Thailand, and the Italian project is expected to take six years, whereas the Thai project is expected to take only three years. However, the firm plans to repeat the Thai project after three years. These projects are mutually exclusive, so Cold Duck Manufacturings CFO plans to use the replacement chain approach to analyze both projects. The expected cash flows for both projects follow:
| Project: | Italian |
|---|---|
| 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: | Thai |
|---|---|
| Year 0: | $475,000 |
| Year 1: | $225,000 |
| Year 2: | $235,000 |
| Year 3: | $255,000 |
If Cold Duck Manufacturings cost of capital is 11%, what is the NPV of the Italian project?
$272,351
$259,972
$222,833
$247,592
Assuming that the Thai 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 Thai project, using the replacement chain approach?
$217,897
$208,818
$190,660
$181,581
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The Analysis And Use Of Financial Statements
Authors: Gerald I. White, Ashwinpaul C. Sondhi, Haim D. Fried
2nd Edition
0471111864, 978-0471111863
