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Question - The replacement chain approach - 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 Spain and Canada, and the Spanish project is expected to take six years, whereas the Canadian project is expected to take only three years. However, the firm plans to repeat the Canadian 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:
Spanish
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
Canadian
-$490,000
$250,000
$265,000
$275,000
If Tasty Tuna Corporation's cost of capital is 12%, what is the NPV of the Spanish project?
Assuming that the Canadian 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 12%, what is the NPV of the Canadian project, using the replacement chain approach?
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