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 ​$45,000 and generate cash inflows of ​$25,000 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 ​$60,000 per year for 6 years. Using​ a(n) 10.59​% cost of​ capital, calculate each​ project's NPV, and make a recommendation based on your findings.

Answer 1

Project Kelvin

Net present value is calculated using a financial calculator by inputting the below:

• Press the CF button.
• CF0= -$45,000. It is entered with a negative sign since it is a cash outflow.
• Cash flow for each year should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the NPV button and enter the weighted average cost of capital of 10.59%.
• Press enter after that. Press the down arrow and CPT buttons to get the net present value.

The net present value of cash flows is $16,531.16.

Project Thompson

Net present value is calculated using a financial calculator by inputting the below:

• Press the CF button.
• CF0= -$265,000. It is entered with a negative sign since it is a cash outflow.
• Cash flow for each year should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the NPV button and enter the weighted average cost of capital of 10.59%.
• Press enter after that. Press the down arrow and CPT buttons to get the net present value.

The net present value of cash flows is -$8,141.27.

Since the projects are mutually exclusive, project Kelvin should be accepted since it has the highest net present value.

In case of any query, kindly comment on the solution