Question

15. The replacement chain approach - Evaluating projects with unequal lives Evaluating projects with unequal lives RTE Telecomm is a U.S. firm that wants to expand its business internationally. It is considering potential projects in both Italy and Ukraine, and the Italian project is expected to take six years, whereas the Ukrainian project is expected to take only three years. However, the firm plans to repeat the Ukrainian project after three years. These projects are mutually exclusive, so RTE Telecomm's CFO plans to use the replacement chain approach to analyze both projects. The expected cash flows for both projects follow: Project: Year 0: Year 1: Year 2: Year 3: Year 4: Year 5: Year 6: Italian $650,000 $220,000 $240,000 $245,000 $270,000 $120,000 $100,000 Project: Year O: Year 1: Year 2: Year 3: Ukrainian $490,000 $250,000 $265,000 $275,000

Answer 1

a) NPV for the italian project is $202485.48. (option B)

b) NPV of the Ukraine using the replacement chain approach is $240009.10. (Option C)

Please find the solution below:

B C D E F K 1 A 2 Year > 12% 1 $(650,000.00 $ 220,000.00 $ 240,000.00 $ 245,000.00 Present value $(650,000.00) $ 196,428.57 $ 191,326.53 $ 174,386.16 =C3 =D3/(1+$K$3)^D2 =E3/(1+$K$3)^E2 =F3/(1+$K$3)^F2 $ 270,000.00 $ 120,000.00 $ 100,000.00 Cost of capital $ 171,589.88 $ 68,091.22 $ 50,663.11 =G3/(1+$K$3)^G2 =H3/(1+$K$3)^H2 =13/(1+$K$3)^12 7 Answer-> NPV $ 202,485.48 =SUM(C4:14) 8 9 B 10 Using Replacement chain approach 11 Year-> 12 13 14 Net Cash Flow-> -490000 250000 265000 275000 -490000 250000 265000 275000 $(490,000.00) $ 250,000.00 $ 265,000.00 $ (215,000.00 $ 250,000.00 $ 265,000.00 $ 275,000.00 Present value $(490,000.00) $ 223,214.29 $ 211,256.38 $ (153,032.75) $ 158,879.52 $ 150,368.12 $ 139,323.56 =C14 =D14/(1+$K$3)^D11 =E14/(1+$K$3)^E11 =F14/(1+$K$3)^F11 =G14/(1+$K$3)^G11 =H14/(1+$K$3)^H11 =114/(1+$K$3)^111 15 16 17 18 Answer-> NPV $ 240,009.10 =SUM(C15:115) 19

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