Alderan Corporation is considering two mutually exclusive projects. Both require

Question

Alderan Corporation is considering two mutually exclusive projects. Both require an initial investment of $10,000, and their risks are average for the firm. Project X has an expected life of 2 years with after-tax cash inflows of $5,300 and $7,000 at the end of Years 1 and 2, respectively. Project Y has an expected life of 4 years with after-tax cash inflows of $3,500 at the end of each of the next 4 years. The firm's WACC is 8%. Use the replacement chain approach to determine the NPV of the most profitable project.

Explanation / Answer

Project evaluation under replacement chain method.,

the projects with unequal life periods have to be compared only when there is repitition in the project is possible,

Here to evaluate between project X & Y X has 2 years life period while Y has 4 years period so we have to repeat X once more to get $ years period to make it par with Y, and then can be easily compared.

So we should select project X

year PVF@8% Project -X - cashflows Discounted cashflows Project - Y - cashflows Discounted cashflows 0 1 - $10,000 -$10,000 - $10,000 - 10,000 1 0.9259 $5,300 4907.27 3,500 3240.65 2 0.8573 $7,000 - $10,000 = - $3,000 - 2571.9 3500 3000.55 3 0.7938 $5,300 4207.14 3500 2778.3 4 0.73503 $7,000 5145.21 3500 2572.605 NPV $ 1,687.72 $1592.105

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