Question

Mulroney Corp. is considering two mutually exclusive projects. Both require an initial investment of $10,000 at t = 0. Project X has an expected life of 2 years with after-tax cash inflows of $6,000 and $7,800 at the end of Years 1 and 2, respectively. In addition, Project X can be repeated at the end of Year 2 with no changes in its cash flows. Project Y has an expected life of 4 years with after-tax cash inflows of $4,300 at the end of each of the next 4 years. Each project has a WACC of 8%. Using the replacement chain approach, what is the NPV of the more profitable project?

Answer 1

The NPV of Project X is as shown below:

Project X
Year	Cash flow	Repeat cash flows	Net Cash flows	PV at 8%
0	$ -10,000.00		$       -10,000.00	$ -10,000.00
1	$     6,000.00		$           6,000.00	$     5,555.56
2	$     7,800.00	$             -10,000.00	$         -2,200.00	$   -1,886.15
3		$                 6,000.00	$           6,000.00	$     4,762.99
4		$                 7,800.00	$           7,800.00	$     5,733.23
Net Present Value (NPV) of Project X				$     4,165.64

The NPV of project Y is as shown below:

Year	Cash flow	PV at 8%
0	$         -10,000.00	$             -10,000.00
1	$             4,300.00	$                 3,981.48
2	$             4,300.00	$                 3,686.56
3	$             4,300.00	$                 3,413.48
4	$             4,300.00	$                 3,160.63
NPV of Project Y		$                 4,242.15

As we can see, TheNPV of project Y is slighly higher, so project Y is more profitable