$13.$ The replacement chain approach $-$ Evaluating projects with unequal lives

Evaluating projects with unequal lives

RTE Telecom Inc. is a U$.$S$.$ firm that wants to expand its business internationally. It is considering potential projects in both France and Canada, and the French project is expected to take six years, whereas the Canadian project is expected to take only three years. However, the firm plans to repeat the Canadian project after three years. These projects are mutually exclusive, so RTE Telecom 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 $0$: $$$$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:

Canadian

Year $0$: $$$$425,000$

Year $1$: $$175,000$

Year $2$: $$200,000$

Year $3$: $$210,000$

If RTE Telecom Inc.$$s cost of capital is $11\%,$ what is the NPV of the French project?

$$247,592$

$$272,351$

$$198,074$

$$235,212$ Assuming that the Canadian project$$s cost and annual cash inflows do not change when the project is repeated in three years and that the cost of capital will remain at $11\%,$ what is the NPV of the Canadian project, using the replacement chain approach?

$$75,617$

$$84,019$

$$92,421$

$$100,823$