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.