Question
Free Spirit Industries is a U.S. firm that wants to expand its business internationally. It is considering potential projects in both Spain and Ukraine, and
Free Spirit Industries is a U.S. firm that wants to expand its business internationally. It is considering potential projects in both Spain and Ukraine, and the Spanish project is expected to take six years, whereas the Ukrainian project is expected to take only three years. However, the firm plans to repeat the Ukrainian project after three years. These projects are mutually exclusive, so Free Spirit Industriess CFO plans to use the replacement chain approach to analyze both projects. The expected cash flows for both projects follow:
| Project: | Spanish |
|---|---|
| Year 0: | $800,000 |
| Year 1: | $380,000 |
| Year 2: | $400,000 |
| Year 3: | $420,000 |
| Year 4: | $375,000 |
| Year 5: | $110,000 |
| Year 6: | $85,000 |
| Project: | Ukrainian |
|---|---|
| Year 0: | $425,000 |
| Year 1: | $175,000 |
| Year 2: | $200,000 |
| Year 3: | $210,000 |
If Free Spirit Industriess cost of capital is 10%, what is the NPV of the Spanish project?
$563,997
$592,197
$620,397
$479,397
Assuming that the Ukrainian 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 10%, what is the NPV of the Ukrainian project, using the replacement chain approach?
$100,099
$115,114
$95,094
$120,119
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Principles of Managerial Finance
Authors: Lawrence J. Gitman, Chad J. Zutter
14th edition
133507696, 978-0133507690
