Question

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.

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.