Question

Pepsico is considering two mutually exclusive projects. Both require an initial investment of $10,000, and their risks are average for the firm. Project X has an expected life of 2 years with after-tax cash inflows of $5,300 and $7,000 at the end of Years 1 and 2, respectively. Project Y has an expected life of 4 years with after-tax cash inflows of $3,700 at the end of each of the next 4 years. The firm's WACC is 8%. Use the replacement chain approach to determine the NPV of the most profitable project.

Answer 1

Project X
Discount rate	8.000%
Year	0	1	2	3	4
Cash flow stream	-10000	5300	-3000	5300	7000
Discounting factor	1.000	1.080	1.166	1.260	1.360
Discounted cash flows project	-10000.000	4907.407	-2572.016	4207.311	5145.209
NPV = Sum of discounted cash flows
NPV Project X =	1687.91
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor

Project Y
Discount rate	8.000%
Year	0	1	2	3	4
Cash flow stream	-10000	3700	3700	3700	3700
Discounting factor	1.000	1.080	1.166	1.260	1.360
Discounted cash flows project	-10000.000	3425.926	3172.154	2937.179	2719.610
NPV = Sum of discounted cash flows
NPV Project Y =	2254.87
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor

Choose project Y as NPV is higher