Question

RTE Telecom, Inc. is a U.S. firm that wants to expand its business internationally. It is considering mutually exclusive potential projects in both Germany and Mexico, and the German project is expected to take six years, whereas the Mexican project is expected to take only three years. However, the three-year project is repeatable. If the cost of capital for each project is 10%, what is the difference in NPVs between the German and Mexican projects?

Project:	German		Project:	Mexican
Year 0:	-$1,120,000		Year 0:	-$425,000
Year 1:	$370,000		Year 1:	$175,000
Year 2:	$390,000		Year 2:	$200,000
Year 3:	$420,000		Year 3:	$210,000
Year 4:	$330,000
Year 5:	$220,000
Year 6:	$95,000

a) $169,753

b) $175,036

c) $185,953

d) $199,005

c) $210,398

Answer 1

Option a is right

Project:	German		Project:	Mexican
Year 0:	($1,120,000)		Year 0:	($425,000)
Year 1:	$370,000		Year 1:	$175,000
Year 2:	$390,000		Year 2:	$200,000
Year 3:	$420,000		Year 3:	($215,000)
Year 4:	$330,000		Year 4:	$175,000
Year 5:	$220,000		Year 5:	$200,000
Year 6:	$95,000		Year 6:	$210,000
NPV	$269,852.06			$100,098.63
Difference	$169,753.43

WORKINGS