Question
Evaluating projects with unequal lives Free Spirit Industries Inc. is a U.S. firm that wants to expand its business internationally. It is considering potential projects
Evaluating projects with unequal lives
Free Spirit Industries Inc. is a U.S. firm that wants to expand its business internationally. It is considering potential projects in both France and Thailand, and the French 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 Free Spirit Industries Inc.s CFO plans to use the replacement chain approach to analyze both projects. The expected cash flows for both projects follow:
| Project: | French |
|---|---|
| Year 0: | $1,120,000 |
| Year 1: | $370,000 |
| Year 2: | $390,000 |
| Year 3: | $420,000 |
| Year 4: | $330,000 |
| Year 5: | $220,000 |
| Year 6: | $95,000 |
| Project: | Thai |
|---|---|
| Year 0: | $520,000 |
| Year 1: | $275,000 |
| Year 2: | $280,000 |
| Year 3: | $295,000 |
If Free Spirit Industries Inc.s cost of capital is 11%, what is the NPV of the French project?
$247,483
$212,128
$188,558
$235,698
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?
$265,968
$310,296
$295,520
$339,848
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Financial Management For Decision Makers
Authors: Peter Atrill
9th Edition
1292311436, 978-1292311432
