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:GermanYear 0:–$1,120,000Year 1:$370,000Year 2:$390,000Year 3:$420,000Year 4:$330,000Year 5:$220,000Year 6:$95,000 Project:MexicanYear 0:–$520,000Year 1:$275,000Year 2:$280,000Year 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?

Given information: Two projects German and Mexican are under consideration where the German project…

Answered: Savory Seafood Inc. is a U.S. firm that…

International Financial Management

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Chapter16: Country Risk Analysis

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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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