In: Finance
Evaluating projects with unequal lives
Your company is considering starting a new project in either France or Ukraine—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 French project is a six-year project that is expected to produce the following cash flows:
Project: | French |
---|---|
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 Ukrainian project is only a three-year project; however, your company plans to repeat the project after three years. The Ukrainian project is expected to produce the following cash flows:
Project: | Ukrainian |
---|---|
Year 0: | –$475,000 |
Year 1: | $225,000 |
Year 2: | $235,000 |
Year 3: | $255,000 |
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 12%. Assuming that the Ukrainian 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 12%, answer the following questions:
The NPV of the French project is:
$182,237
$222,734
$202,485
$212,609
The NPV of the Ukrainian project is:
$194,604
$170,279
$162,170
$186,496