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 $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?

Answer 1

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 .