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

Evaluating projects with unequal lives

Savory Seafood 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 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 Savory Seafoods CFO plans to use the replacement chain approach to analyze both projects. The expected cash flows for both projects follow:

Project:	German
Year 0:	$650,000
Year 1:	$220,000
Year 2:	$240,000
Year 3:	$245,000
Year 4:	$270,000
Year 5:	$120,000
Year 6:	$100,000

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

If Savory Seafoods cost of capital is 9%, what is the NPV of the German project?

$271,916

$285,512

$231,129

$258,320

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?

$294,210

$340,665

$309,695

$356,149