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 ​$5 and generate cash inflows of ​$10 per year for the next 33 years. Project Thompson involves replacement of the existing​ system; it will cost ​$265 and generate cash inflows of ​$61 per year for 66 years. Using​ a(n) 11.89 cost of​ capital, calculate each​ project's NPV, and make a recommendation based on your findings.

Answer 1

Net Present Value (NPV) - Project Kelvin

Year	Annual Cash Flow ($)	Present Value factor at 11.89%	Present Value of Cash Flow ($)
1	10,000	0.893735	8,937.35
2	10,000	0.798762	7,987.62
3	10,000	0.713882	7,138.82
TOTAL			24,063.79

Net Present Value (NPV) = Present Value of annual cash inflows – Initial Investment

= $24,063.79 - $5,000

= $19,063.79

Net Present Value (NPV) - Project Thompson

Year	Annual Cash Flow ($)	Present Value factor at 11.89%	Present Value of Cash Flow ($)
1	61,000	0.893735	54,517.83
2	61,000	0.798762	48,724.49
3	61,000	0.713882	43,546.78
4	61,000	0.638021	38,919.27
5	61,000	0.570222	34,783.51
6	61,000	0.509627	31,087.24
TOTAL			2,51,579.13

Net Present Value (NPV) = Present Value of annual cash inflows – Initial Investment

= $2,51,579.13 - $265,000

= -$13,420.87 (Negative NPV)

DECISION

As per the NPV analysis, the Project is acceptable if the NPV is greater than Zero. Therefore, the Axis Corp should select Project Kelvin, since it has the Positive Net Present Value of $19,063.79.

NOTE

The Formula for calculating the Present Value Factor is [1/(1 + r)ⁿ], Where “r” is the Discount/Interest Rate and “n” is the number of years.