Schweser Mock exam, morning session #26:
Their discussion then moves on to investment decisions that are pending on Porter’s desk. Jupiter Fuels’ chemical division is considering replacing one of its fractionating columns to reduce manufacturing costs. Porter is not going to replace any of the columns being considered beyond their useful lives. Two new models are being considered. Porter has estimated a project-specific WACC of 11.0%. Based on estimates provided by various departments at Jupiter Fuels, Rogers has created the following cash flow estimates for the Alpha-9 and the Beta-T models:
.style2 {border: 1px solid #000000; color: #000000} .style3 {border: 1px solid #000000; color: #000000; text-align: center} .style9 {color: #000000; text-align: right; border: 1px solid #000000} .style53 {color: #000000; text-align: right; border: 1px solid #000000} .styleA {border-collapse:collapse} Alpha-9 (3 years): -300, 100, 200, 300
Beta-T (6 years): -800, 200, 200, 300, 200, 200, 350
Alpha9: NPV @ 11% is 171.77, replacement chain is 297
BetaT: NPV @ 11% is 199
The answer is BetaT because it has a higher NPV. Why would we not consider the replacement chain NPV here or the EAA? Shouldn’t we consider the difference in asset lives?