13. 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 Spain and Canada, and the Spanish 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 Blue Elk Manufacturings CFO plans to use the replacement chain approach to analyze both projects. The expected cash flows for both projects follow:

Project:	Spanish
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:	$520,000
Year 1:	$275,000
Year 2:	$280,000
Year 3:	$295,000

If Blue Elk Manufacturings cost of capital is 13%, what is the NPV of the Spanish project?

$191,893

$201,488

$172,704

$163,109

Assuming that the Canadian 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 13%, what is the NPV of the Canadian project, using the replacement chain approach?

$286,393

$261,489

$236,585

$249,037