Year Proj Y Proj Z

0 ($2,100,000) ($2,100,000)

1 2,000,000 950,000

2 950,000 780,000

3 730,000

4 875,000

The projects provide a necessary service, so whichever one is selected is expected to be repeated into the foreseeable future. Both projects have an 10% cost of capital.

- What is each projects initial NPV without replication? Which project will you choose?

-What is each projects equivalent annual annuity? Which project will you choose?

-Now apply the replacement chain approach to determine the shorter projects extended NPV. Which project should be chosen?

Now assume that the cost to replicate Project Y in 2 years will increase by $750,000 because of inflationary pressures. How should the analysis be handled now, and which project should be chosen?