Question

Wayne Company is considering a long-term investment project called ZIP. ZIP will require an investment of $120,000. It will have a useful life of 4 years and no salvage value. Annual cash inflows would increase by $80,000, and annual cash outflows would increase by $40,000. The company's required rate of return is 12%. Click here to view PV table. 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.) хш шшшии Net present value

Answer 1

Net cash inflows per year = Increase in annual cash inflows - Increase in annual cash outflows

= $80,000 - $40,000

= $40,000

Therefore, net cash inflows per year is $40,000.

Years	Present Value Factory (a) (1/1.12=)	Net Cash Inflows (b)	Present Value Cash flows (a*b)
0	1	($120,000)	($120,000)
1	0.892857143	$40,000	$35,714
2	0.797193878	$40,000	$31,888
3	0.711780248	$40,000	$28,471
4	0.635518078	$40,000	$25,421
		NPV	$1,494

Therefore, the net present value (NPV) IS $1,494 (positive because the net cash flows during the 4 years is more than total investment of $120,000 by $1,494.