Question

The NPV of project Kelvin is ?

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 $20,000 and generate cash inflows of $15,000 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 cost of capital of 11%, calculate each project's NPV, and make a recommendation based on your findings. The NPV of project Kelvin is $ (Round to the nearest cent.)

The NPV of project Thompson is ?

Which project should the company choose?

Answer 1

Solution: = Peryear for next 3 years = $265000 The values provided in the question are as follows! $ch) intial cost of Project Kelvinor cashoutHow = $20000 Of Project Kelvin (CF,-3) Cash in flow (per $15000 >() Number of useful life of Powject kelvin = 3 yearst >(CFO) Replacement cost of project Thompsonatyearo OR Cashout How (CF1-6) Cash inHow of Project Thompson Peryear- $ 60000 for the next 6 years → (8) Regnised Rate of Retum = 11% OR 0.11 > (n) Number of useful life of project Thompson = 6 yease. Demand of Questton Net Present Value (NPU) of each pooject. (B) Recommendation based on your findings. (1) Cakulation of Present value Annuity Factor PVAF Where r=11% OR 0.11 (11%, 3year) n= 3 years for Porject Kelvin CĄ

- (8,9) PVA (1+2)", (1+r)" xr Using the values, PVAF (112., 3years) C1+0.11) -| (1+0.11) X 0.11 اور ۱۰11) PUAF (114., 3years) - Chill) 3x0.11 PVAF (117., 3years) 1.367631-1 1.3676318 Ooll 0.367631 0.1504394) PVAF (11%. 2.44371471544 (119.134ean) DvAE117,3yean) = 2.4437 (D) Calculallon of Present value Annuity factor PVAF (117., 6years) [where 8=!1%. ORO.11 ,-6 years] PUAF (170.11)6- (1+0.11)6 x 0.11 the values, PAF 1.07041455216-1 (119.76 years (1.11)6X0.11 1.07041455 216 0.11 PUAF 0.87041455216 24.2305 3785389 (117.,64ean) 0.20574560073 PVAF 4.2305 (117.76yean) byears) Using the values, (1.116-1

(A) (1) Calculation of Net Present value (NPU) for the Kelvin Profect (0) (B) (A) (D) =(B) x(0) PVAF Cashinflow Present Value Years (!1 %, gyears) ( Given (W.N-1) 1-3 2.4437 $36,655.50 $15000 (Ceiven) $20,000.00 (B) Total Presentralie alue of cashin flow $ 36,655.50 Lens! Cash out flow Net Presentralue (NPV) $16,655.50 fer Project Kelvin) (2) Calculation of Net Present Value (NPV) for Thompson Proteit (C) (D) -(B) x(C) CA) Present Value Years PVAF Cashinflow (11%., 6years) (PV) laiven) (W-N-2) 1-6 $60000 Total Present value of cashindow $253,830.00 Less! Initial Outlayorcan camhout How $ 265000.00 (Given) Net Besent value $ 11,170.00 (fer Thompson Pooled) 4.2305 $253,830.00

NPV (B) Recommendations on the basis findings. Project Kelvin fW.N-A-413] $ 16,655.50 Thompson hiN- A-(2)] $ 11,170.00 Decision criteria. if NPU is greater than 0.ie. Positive NPV, Accept the Project → of NPU is less than o le. Negative Nov, Reject the project Recommendation The is advised to take the decision regarding the project of Kelvin because Project Kelvin gives the positive NPu. management is advised to