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 $70,000 and generate cash inflows of $30,000 per year for the next 3 years. Project Thompson involves the replacement of the existing system; it will cost $275, 000 and generate cash inflows of $61 comma 000 per year for 6 years. Using a(n) 11.14% cost of capital, calculate each project's NPV, and make a recommendation based on your findings.

Answer #1

NPV = PV of Cash Inflows - PV of Cash Outflows

Project Kelvin:

Year |
CF |
PVF @11.14% |
Disc CF |

0 | $ -70,000.00 | 1.0000 | $ -70,000.00 |

1 | $ 30,000.00 | 0.8998 | $ 26,992.98 |

2 | $ 30,000.00 | 0.8096 | $ 24,287.37 |

3 | $ 30,000.00 | 0.7284 | $ 21,852.95 |

NPV |
$ 3,133.30 |

Project Thompson:

Year |
CF |
PVF @11.14% |
Disc CF |

0 | $ -2,75,000.00 | 1.0000 | $ -2,75,000.00 |

1 | $ 61,000.00 | 0.8998 | $ 54,885.73 |

2 | $ 61,000.00 | 0.8096 | $ 49,384.32 |

3 | $ 61,000.00 | 0.7284 | $ 44,434.33 |

4 | $ 61,000.00 | 0.6554 | $ 39,980.50 |

5 | $ 61,000.00 | 0.5897 | $ 35,973.10 |

6 | $ 61,000.00 | 0.5306 | $ 32,367.38 |

NPV |
$ -17,974.64 |

Project Kelvin is suggested as it has +ve NPV.

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