Q6. Haggerty is using the replacement-chain method, depending only on data from the new factory fact sheet and the cash-flow estimate for the remodeling projects. Which strategy should Haggerty recommend, and what is the difference between that project’s NPV and that of the other project?
[2009] Session 8 -Reading 28: Capital Budgeting LOS c~ Q6
All numbers are in millionsfficeffice" />
Project
Initial
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Cost of Capital
NPV
New Factory
-$85
-$17.17
$15.61
$42.45
$42.45
$42.45
$88.00
14.3%
$26.09
Factory Upgrade
-$30
$15
$17
$28
14.3%
$14.89
Factory Upgrade
-$30
$15
$17
$28
14.3%
$14.89
Combined Upgrade Projects
-$30
$15
$17
-$2
$15
$17
$28
14.3%
$24.86
All numbers are in millions, excluding percentages
The new factory has a higher NPV than would remodeling the two factories consecutively. As such, Haggerty should recommend the new factory. The difference between the NPVs of the two strategies is $1.235 million, rounded up to $1.24 million.