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 $35,000 and generate cash inflows of $20,000 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 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.)

Answer 1

Ans:- NPV is calculated by the Present Value of cash flow - Initial Investment. we will use the NPV function of excel to calculate the Present Value and then subtract with Initial Investment to find the Net Present Value.

G17 fac А B C D E 1 N 3 Years 4 0 5 1 6 2 CF of Project Kelvin CF of Project Thompson -35000 -220000 20000 50000 20000 50000 20000 50000 50000 50000 7 3 8 4 9 5 10 50000 11 12 NPV 13874.29 * -8,473.11

D16 foc A B С D E 1 2 3 4 Years CF of Project Kelvin 0 -35000 1 20000 2 20000 CF of Project Thompson -220000 50000 5 6 50000 7 3 20000 50000 50000 8 4 9 5 50000 50000 10 11 12 NPV =NPV(11%,D5:07)-35000 =NPV(11%,E5:E10)-220000

From the above analysis, it is clear that Project Kelvin should be selected because it has Positive NPV value whereas project Thompson should be rejected because it has negative NPV value.

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