12-2 Wayne Company is considering a long-term investment project called ZIP. ZIP

Question

12-2

Wayne Company is considering a long-term investment project called ZIP. ZIP will require an investment of $122,228. It will have a useful life of 4 years and no salvage value. Annual cash inflows would increase by $79,800, and annual cash outflows would increase by $39,900. The company's required rate of return is 11%. Calculate the net present value on this project. (If the net present value is negative, use either a negative sign preceding the number eg-45 or parentheses eg(45). Round present value answer to 0 decimal places, e.g.125. For calculation purposes, use 5 decimal places as displayed in the factor table provided.) Net present value whether this project should be accepted? The project should be

Explanation / Answer

1.

Estimated annual cash inflows   $79,800

Estimated annual cash outflows $39,900

Net annual cash flow               $39,900

PV of net annual cash flow

less Capital investment

$39,900

3.10245*

$123788

$122,228

* Discount factor @11% for four years

2. Computed NPV is positive so the project can be selected

Particulars Cash flows Discount factor @ 11% Present Value

PV of net annual cash flow

less Capital investment

$39,900

3.10245*

$123788

$122,228

NET PRESENT VALUE $1,560

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