Tasty Tuna Corporation is a U.S. firm that wants to expand its business internationally. It is considering potential projects in both Germany and Thailand, and the German project is expected to take six years, whereas the Thai project is expected to take only three years. However, the firm plans to repeat the Thai project after three years. These projects are mutually exclusive, so Tasty Tuna Corporation’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: –$800,000 Year 1: $380,000 Year 2: $400,000 Year 3: $420,000 Year 4: $375,000 Year 5: $110,000 Year 6: $85,000 Project: Thai Year 0: –$475,000 Year 1: $225,000 Year 2: $235,000 Year 3: $255,000 If Tasty Tuna Corporation’s cost of capital is 10%, what is the NPV of the German project? a.)$535,797 b.)$563,997 c.)$507,597 d.)$451,198 Assuming that the Thai 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 10%, what is the NPV of the Thai project, using the replacement chain approach? a.)$212,106 b.)$202,006 c.)$181,805 d.)$222,207
Tasty Tuna Corporation is a U.S. firm that wants to expand its business internationally. It is considering potential projects in both Germany and Thailand, and the German project is expected to take six years, whereas the Thai project is expected to take only three years. However, the firm plans to repeat the Thai project after three years. These projects are mutually exclusive, so Tasty Tuna Corporation’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: –$800,000 Year 1: $380,000 Year 2: $400,000 Year 3: $420,000 Year 4: $375,000 Year 5: $110,000 Year 6: $85,000 Project: Thai Year 0: –$475,000 Year 1: $225,000 Year 2: $235,000 Year 3: $255,000 If Tasty Tuna Corporation’s cost of capital is 10%, what is the NPV of the German project? a.)$535,797 b.)$563,997 c.)$507,597 d.)$451,198 Assuming that the Thai 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 10%, what is the NPV of the Thai project, using the replacement chain approach? a.)$212,106 b.)$202,006 c.)$181,805 d.)$222,207
Chapter16: Country Risk Analysis
Section: Chapter Questions
Problem 5ST
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Evaluating projects with unequal lives
Tasty Tuna Corporation is a U.S. firm that wants to expand its business internationally. It is considering potential projects in both Germany and Thailand, and the German project is expected to take six years, whereas the Thai project is expected to take only three years. However, the firm plans to repeat the Thai project after three years. These projects are mutually exclusive, so Tasty Tuna Corporation’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: | –$800,000 |
| Year 1: | $380,000 |
| Year 2: | $400,000 |
| Year 3: | $420,000 |
| Year 4: | $375,000 |
| Year 5: | $110,000 |
| Year 6: | $85,000 |
|
Project:
|
Thai
|
|---|---|
| Year 0: | –$475,000 |
| Year 1: | $225,000 |
| Year 2: | $235,000 |
| Year 3: | $255,000 |
If Tasty Tuna Corporation’s cost of capital is 10%, what is the NPV of the German project?
a.)$535,797
b.)$563,997
c.)$507,597
d.)$451,198
Assuming that the Thai 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 10%, what is the NPV of the Thai project, using the replacement chain approach?
a.)$212,106
b.)$202,006
c.)$181,805
d.)$222,207
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