Question

The cash flows for two projects, A and B, are shown in the table, below. Notice that Project A has a life of 5 years and Project B has a 3 year life. Calculate the NPV of each project and calculate which should be adopted using the replacement chain approach. Assume that the cost of capital is 10%.

	Project CFs	Project CFs
Time	A	B
0	-100	-150
1	20	75
2	25	60
3	30	50
4	30
5	40
NPV	6.7097	5.3343

answer is -2.85
How to get this number?

Answer 1

PROJECT A NEEDS REPLACEMENT EVERY 5 YEARS AND PROJECT B NEEDS REPLACEMENT EVERY 3 YEARS

SO I HAVE PREPARED CFs ACCORDINGLY.

SEE IMAGE. AT THE END OF 5TH YEAR, WE HAVE TO BUY AGAIN PROJECT A FOR WHICH COST IS 100. SO NET CF = 40 -100 = -60

SAME WAY FOR PROJECT B. AT THE END OF 3RD YEAR : CF=50 AND PROJECT COST = 150, SO NET CF = -100.

HAPPY TO HELP YOU.