Project A Project B Year Cash Flow Cash Flow 0 -$140,000 -$100,000 1 60,000 30,000 2 60,000 30,000 3 60,000 30,000 4 30,000 5 30,000 6 30,000 What is the NPV for each investments under the replacement approach?

Xyz corporation is faced with two mutually exclusive investment

The NPV for each investment under the replacement approach can be calculated using the following formula:
NPV = CF0 + (CF1/(1+r)) + (CF2/(1+r)^2) + … + (CFn/(1+r)^n).
Where, r is the cost of capital and CF represents cash flows in a given year. For Project A, we have:

NPV = -$140,000 + ($60,000/ (1+ 0.12)) + ($60,000 /(1+0.12)^2)+ ($60,000 /(1+0.12)^3)+ ($30,000 /(1+0.12)^4)+ ($30,0000 /( 1+ 0.12 ) ^5)+ $30 000/( 1 + .012 ) ^6

Therefore NPV for Project A = -$24 543.

For Project B we have:

NPV = -$100 000+( $30 000/ ( 1+.012 ))+( $30 000/ ( 1+.012 ) ^ 2 )+( $30 000/ ( 1+.012 )) ^3+( $ 30 000/ ( 1+.012 ))^ 4 +($ 30 0000/ (.0120 ) ^5

Therefore NPV for Project B= -$50 872