Evaluating projects with unequal lives Your company is considering starting a new project in either Germany or
Question:
Evaluating projects with unequal lives
Your company is considering starting a new project in either Germany or Thailand—these projects are mutually exclusive, so your boss has asked you to analyze the projects and then tell her which project will create more value for the company’s stockholders.
The German project is a six-year project that is expected to produce the following cash flows:
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 |
The Thai project is only a three-year project; however, your company plans to repeat the project after three years. The Thai project is expected to produce the following cash flows:
Project: | Thai |
---|---|
Year 0: | –$490,000 |
Year 1: | $250,000 |
Year 2: | $265,000 |
Year 3: | $275,000 |
Because the projects have unequal lives, you have decided to use the replacement chain approach to evaluate them. You have determined that the appropriate cost of capital for both projects is 13%. Assuming that the Thai project’s cost and annual cash inflows do not change when the project is repeated in three years and that the cost of capital remains at 13%, answer the following questions:
The NPV of the German project is:
$190,262
$172,142
$181,202
$199,322
The NPV of the Thai project is:
$262,819
$219,016
$240,918
$251,868
Physics for Scientists and Engineers A Strategic Approach with Modern Physics
ISBN: 978-0133942651
4th edition
Authors: Randall D. Knight