Savory Seafood Inc. is a U.S. firm that wants to expand its business internationally. It is considering 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 firm plans to repeat the Mexican project after three years. These projects are mutually exclusive, so Savory Seafood Inc.’s CFO plans to use the replacement chain approach to analyze both projects. The expected cash flows for both projects follow
Savory Seafood Inc. is a U.S. firm that wants to expand its business internationally. It is considering 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 firm plans to repeat the Mexican project after three years. These projects are mutually exclusive, so Savory Seafood Inc.’s CFO plans to use the replacement chain approach to analyze both projects. The expected cash flows for both projects follow
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Savory Seafood Inc. is a U.S. firm that wants to expand its business internationally. It is considering 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 firm plans to repeat the Mexican project after three years. These projects are mutually exclusive, so Savory Seafood Inc.’s CFO plans to use the replacement chain approach to analyze both projects. The expected cash flows for both projects follow:
|
Project:
|
German
|
|---|---|
| Year 0: | –$1,120,000 |
| Year 1: | $370,000 |
| Year 2: | $390,000 |
| Year 3: | $420,000 |
| Year 4: | $330,000 |
| Year 5: | $220,000 |
| Year 6: | $95,000 |
|
Project:
|
Mexican
|
|---|---|
| Year 0: | –$520,000 |
| Year 1: | $275,000 |
| Year 2: | $280,000 |
| Year 3: | $295,000 |
- If Savory Seafood Inc.’s cost of capital is 11%, what is the
NPV of the German project? - Assuming that the Mexican 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 11%, what is the NPV of the Mexican project, using the replacement chain approach?
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