Question
Your company is considering starting a new project in either Italy or Canada-these projects are mutually exclusive, so your boss has asked you to analyze
Your company is considering starting a new project in either Italy or Canada-these projects are mutually exclusive, so your boss has asked you to analyze the projects and then tell her which project will create more value for the company's stockholders.
The Italian project is a six-year project that is expected to produce the following cash flows:
Project: Italian
Year 0: -$800,000
Year 1: $380,000
Year 2: $400,000
Year 3: $420,000
Year4: $375,000
Year 5: $110,000
Year 6: $85,000
The Canadian project is only a three-year project; however, your company plans to repeat the project after three years. The Canadian project is expected to produce the following cash flows:
Project Canadian:
Year 0 -$475,000
Year 1 $225,000
Year 2 $235,000
Year 3 $255,000
Because the projects have unequal lives, you have decided to use the replacement chain approach to evaluate them. You have determined that the appropriate cost of capital for both projects is 13%. Assuming that the Canadian project's cost and annual cash inflows do not change when the project is repeated in three years and that the cost of capital remains at 13%, fill out the following table:
NPV Italian project (which answer):
400,476
376,918
494,705
471,148
NPV Canadian project (which answer):
136,525
150,896
143,710
172,452
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