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

Bohemian Manufacturing Company is a U.S. firm that wants to expand its business internationally. It is considering potential projects in both Germany and Mexico, and the German proj ect is expected to take six years, whereas the Mexican proj ect is expected to t ake only three years. However, the firm plans to repeat the Mexican project after three years. These projects are mutually exclusive, so Bohemian Manufacturing Company's CFO plans to use the replacement chain approach to analyze both projects. The expected cash flows for both projects follow:

Assuming that the Mexican project's cost and annual cash inflows do not change when the proj ect is repeated in three years and that the cost of

capital will remain at 11 %, what is the NPV of the Mexican project, using the replacement chain approach?

A) $199,739

B) $163,423

C) $181,581

D) $172,502

Project	German
Year 0	-975000
1	350000
2	370000
3	390000
4	320000
5	115000
6	80000

Project	Mexican
Year 0	-475000
1	225000
2	235000
3	255000

If Bohemian Manufacturing Company's cost of capital is 11 %, what is the NPV of the German project?

A) 198074

B) 272351

C) 247592

D)259972