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

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 $10,000 and generate cash inflows of $10,000 per year for the next 3 years. Project Thompson involves replacement of the existing system; it will cost $220,000 and generate cash inflows of $50,000 per year for 6 years. Using a(n) 10.93% cost of capital, calculate each project's NPV, and make a recommendation based on your findings.
NPV of project Kelvin is ?

The NPV of project Thompson is ?
which should they choose?

Solutions

Expert Solution

NPV of Project Kelvin = Cash Inflow * PVAF( r , n ) - Initial Cost

= $10,000 * PVAF ( 10.93% , 3 ) - $10,000

= $10,000 * 2.44669 - $10,000

= $14,466.93

NPV of Project Thompson = Cash Inflow * PVAF( r ,n ) - Initial Cost

= $50,000 * PVAF(10.93% , 6 ) - $220,000

= $50,000 * 4.239 - $220,000

= $211,954.1 - $220,000

= - $8,045.87

Choose Project Kelvin as it has a positive NPV

And NPV is to be choosen in case it is greater than or equal to zero .

jeff jeffy answered 1 year ago

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