Question

Axis Corp. is considering an investment in the best of two mutually exclusive projects. Project Kelvin...

Axis Corp. is considering an investment in the best of two mutually exclusive projects.

Project Kelvin involves an overhaul of the existing​ system; it will cost ​\$20,000 and generate cash inflows of ​\$15,000 per year for the next 3 years.

Project Thompson involves replacement of the existing​ system; it will cost ​\$265,000 and generate cash inflows of ​\$61,000 per year for 6 years.

Using​ a(n) 9.28​% cost of​ capital, calculate each​ project's NPV, and make a recommendation based on your findings.

Homework Answers

Answer #1

Using least common approach to calculate the Npv of the project

Calculating the Npv of existing system using financial calculator

Inputs: C0= -20,000

C1= 15,000. Frequency= 2

C2= 15,000 - 20,000 = -5,000. Frequency= 1

C3= 15,000. Frequency= 3

I= 9.28%

Npv= compute

We get, Npv of the project as \$31,405.47

Using financial calculator to calculate Npv of new project

Inputs: C0= -265,000

C1= 61,000. Frequency= 6

I = 9.28%

Npv= compute

We get, Npv of the project as \$6,371.64

As the Npv of the existing machine is more than the new machine, we should choose the existing machine.

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