Question

Warm-Up 10-3 (similar to) Question Help 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 $65,000 and generate cash inflows of $30,000 per year for the next 3 years. Project Thompson involves replacement of the existing system; it will cost $245,000 and generate cash inflows of $55,000 per year for 6 years. Using a cost of capital of 12%, 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

Answer:
a1. Calculation of NPV of Kelvin				a2. Calculation of NPV of Thompson
Formula will will use here				Formula will will use here
NPV =	Present value of Cash inflows - Initial cost			NPV =	Present value of Cash inflows - Initial cost
Initial cost =	65000.00				Initial cost =	245000.00
Year	Cash Inflows	Present value factor @ 12%	Present value of cash inflows		Year	Cash Inflows	Present value factor @ 12%	Present value of cash inflows
1	30000.00	0.89286	26785.71		1	55000.00	0.89286	49107.14
2	30000.00	0.79719	23915.82		2	55000.00	0.79719	43845.66
3	30000.00	0.71178	21353.41		3	55000.00	0.71178	39147.91
4	0.00	0.63552	0.00		4	55000.00	0.63552	34953.49
5	0.00	0.56743	0.00		5	55000.00	0.56743	31208.48
6	0.00	0.50663	0.00		6	55000.00	0.50663	27864.71
Total	72054.94		Total	226127.40
NPV					NPV
Present vallue of cash inflows	72054.94			Present vallue of cash inflows	226127.40
Less: Initial cost		65000.00			Less: Initial cost		245000.00
NPV		$7,054.94			NPV		-$18,872.60
b) Since the NPV of project Thompson is negative, Project Kelvin should be accpeted