15. 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 Italy and Ukraine, and the Italian project is expected to take six years, whereas the Ukrainian project is expected to take only three years. However, the firm plans to repeat the Ukrainian 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:	Italian
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:	Ukrainian
Year 0:	$520,000
Year 1:	$275,000
Year 2:	$280,000
Year 3:	$295,000

If Blue Elk Manufacturings cost of capital is 9%, what is the NPV of the Italian project?

A: $597,448

B: $627,320

C: $657,193

D: $567,576

Assuming that the Ukrainian 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 Ukrainian project, using the replacement chain approach?

A: $381,611

B: $398,957

C: $346,919

D: $416,303