Question

Savory Seafood is a U.S. firm that wants to expand its business internationally. It is considering potential projects in both France and Canada, and the French project is expected to take six years, whereas the Canadian project is expected to take only three years. However, the firm plans to repeat the Canadian project after three years. These projects are mutually exclusive, so Savory Seafood’s CFO plans to use the replacement chain approach to analyze both projects. The expected cash flows for both projects follow:

Project:	French
Year 0:	–$700,000
Year 1:	$240,000
Year 2:	$270,000
Year 3:	$290,000
Year 4:	$250,000
Year 5:	$130,000
Year 6:	$110,000

Project:	Canadian
Year 0:	–$490,000
Year 1:	$250,000
Year 2:	$265,000
Year 3:	$275,000

If Savory Seafood’s cost of capital is 13%, what is the NPV of the French project?

$161,238

$201,547

$211,624

$181,392

Assuming that the Canadian project’s cost and annual cash inflows do not change when the project is repeated in three years and that the cost of capital will remain at 13%, what is the NPV of the Canadian project, using the replacement chain approach?

$229,967

$251,868

$219,016

$197,114

Answer 1

For solving canadian project: replacement chain approach is followed, means, at the end of year 3 again same cash flows start as beginning