Question

Axis Corp. is considering investment in the best of two mutually exclusive projects. Project Kelvin involves an overhaul of the existing system; it will cost $52,500 and generate cash inflows of $24,500 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 $61,000 per year for 6 years. Using an 8.75% 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 @8.75%	Disc CF
0	$ -52,500.00	1.0000	$ -52,500.00
1	$ 24,500.00	0.9195	$ 22,528.74
2	$ 24,500.00	0.8456	$ 20,716.08
3	$ 24,500.00	0.7775	$ 19,049.27
NPV			$    9,794.08

Project Thompson:

Year	CF	PVF @8.75%	Disc CF
0	$ -2,65,000.00	1.0000	$ -2,65,000.00
1	$      61,000.00	0.9195	$      56,091.95
2	$      61,000.00	0.8456	$      51,578.81
3	$      61,000.00	0.7775	$      47,428.79
4	$      61,000.00	0.7150	$      43,612.68
5	$      61,000.00	0.6574	$      40,103.61
6	$      61,000.00	0.6045	$      36,876.89
NPV			$      10,692.73

Project Thompson is selected as it has higher NPV.