12. The replacement chain approach - Evaluating projects with unequal lives

Evaluating projects with unequal lives

Blue Elk Manufacturing is a U.S. firm that wants to expand its business internationally. It is considering potential projects in both Germany and Thailand, and the German 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 Blue Elk Manufacturings CFO plans to use the replacement chain approach to analyze both projects. The expected cash flows for both projects follow:

Project:	German
Year 0:	$700,000
Year 1:	$240,000
Year 2:	$270,000
Year 3:	$290,000
Year 4:	$250,000
Year 5:	$130,000
Year 6:	$110,000

Project:	Thai
Year 0:	$425,000
Year 1:	$175,000
Year 2:	$200,000
Year 3:	$210,000

If Blue Elk Manufacturings cost of capital is 12%, what is the NPV of the German project?

$224,319

$190,671

$235,535

$201,887

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 12%, what is the NPV of the Thai project, using the replacement chain approach?

$68,750

$65,313

$79,063

$72,188