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

Evaluating projects with unequal lives

Cold Duck Manufacturing Inc. is a U.S. firm that wants to expand its business internationally. It is considering potential projects in both Italy and Mexico, and the Italian project is expected to take six years, whereas the Mexican project is expected to take only three years. However, the firm plans to repeat the Mexican project after three years. These projects are mutually exclusive, so Cold Duck Manufacturing Inc.s CFO plans to use the replacement chain approach to analyze both projects. The expected cash flows for both projects follow:

Project:	Italian
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:	Mexican
Year 0:	$490,000
Year 1:	$250,000
Year 2:	$265,000
Year 3:	$275,000

If Cold Duck Manufacturing Inc.s cost of capital is 9%, what is the NPV of the Italian project?

$313,485

$298,557

$253,773

$283,629

Assuming that the Mexican 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 9%, what is the NPV of the Mexican project, using the replacement chain approach?

$340,665

$294,210

$309,695

$356,149