Mulroney Corp. is considering two mutually exclusive projects. Both require an i

Question

Mulroney Corp. is considering two mutually exclusive projects. Both require an initial investment of $10,000 at t = 0. Project X has an expected life of 2 years with after-tax cash inflows of $6,000 and $7,800 at the end of Years 1 and 2, respectively. In addition, Project X can be repeated at the end of Year 2 with no changes in its cash flows. Project Y has an expected life of 4 years with after-tax cash inflows of $4,300 at the end of each of the next 4 years. Each project has a WACC of 8%. Using the replacement chain approach, what is the NPV of the most profitable project?

Explanation / Answer

Mulorney Corp

Discounted cashflows over a common life under Replacement chain method

Mulorney Corp

Discounted cashflows over a common life under Replacement chain method

Years 0 1 2 3 4 Project Y ($10,000) $4,300 $4,300 $4,300 $4,300 Pv factor@8% 1 0.9259259 0.85733882 0.793832241 0.7350299 Discounted cash flows ($10,000) $3,981.48 $3,686.56 $3,413.48 $3,160.63 Cumulative Discounted cashflows ($10,000) ($6,018.52) ($2,331.96) $1,081.52 $4,242 Project X ($10,000) $6,000 $7,800 2 nd Project ($10,000) $6,000 $7,800 Discounted cash flows ($10,000) $5,555.56 ($1,886) $4,762.99 $5,733.23 Cumulative Discounted cashflows ($10,000.00) ($4,444.44) ($6,330.59) ($1,567.60) $4,165.64 NPV of Project Y is $4,242 NPv of Project X is $4,165.64 Since the NPV of Project Y is higher than Project X , Project Y is more profitable and its NPV is $4,242

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