Question: 13. The replacement chain approach - Evaluating projects with unequal lives Evaluating projects with unequal lives Free Spirit Industries Inc. is a U.S. firm that
13. The replacement chain approach - Evaluating projects with unequal lives
Evaluating projects with unequal lives
Free Spirit Industries Inc. is a U.S. firm that wants to expand its business internationally. It is considering potential projects in both Spain and Thailand, and the Spanish 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 Free Spirit Industries Inc.s CFO plans to use the replacement chain approach to analyze both projects. The expected cash flows for both projects follow:
| Project: | Spanish |
|---|---|
| Year 0: | $800,000 |
| Year 1: | $380,000 |
| Year 2: | $400,000 |
| Year 3: | $420,000 |
| Year 4: | $375,000 |
| Year 5: | $110,000 |
| Year 6: | $85,000 |
| Project: | Thai |
|---|---|
| Year 0: | $530,000 |
| Year 1: | $280,000 |
| Year 2: | $290,000 |
| Year 3: | $310,000 |
If Free Spirit Industries Inc.s cost of capital is 13%, what is the NPV of the Spanish project?
A. $471,148 B. $424,033 C. $376,918 D. $518,263
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 13%, what is the NPV of the Thai project, using the replacement chain approach?
A. $324,548 B. $270,457 C. $283,980 D. $243,411
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