Question

Do It Review 26-2 Your answer is partially correct. Try again. Wayne Company is considering a long-term investment project called ZIP. ZIP will require an investment of $129,984. It will have a useful life of 4 years and no salvage value. Annual cash inflows would increase by $80,600, and annual cash outflows would increase by $38,300. The company's required rate of return is 11%. 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.) Net present value 42300 Whether this project should be accepted? accepted The project should be

Answer 1

Increase in annual cash inflows Increase in annual cash outflows Net annual cash inflows Annuity factor @ 11% for 4 years Present value of net annual cash flows Less: Initial investment Net Present Value (NPV) $80,600 -$38,300 $42,300 3.10245 [Rounded-off to 5 decimal places] $131,234 -$129,984 $1,250 Positive NPV implies that the project is capable of recovering present value of all its cash outflows before expiry of the project's life itself. So, as the NPV is positive, this project shall be accepted. NOTE: Annuity factor @ 11% for 4 years can be traced from the PVA of $1 table provided or it can be calculated using EXCEL FUNCTION PV(rate,nper,pmt,fv,type) where rate=11%; nper=4; pmt=-1, fv=0; type=0. Here, type = 0 implies that the cash flows occur at the end of each year only; pmt=-1 as it is an annuity factor.

EXCEL SCREENSHOT: 1 Increase in annual cash inflows 2 Increase in annual cash outflows 3 Net annual cash inflows 4 Annuity factor @ 11% for 4 years 5 Present value of net annual cash flows 6 Less: Initial investment 7 Net Present Value (NPV) $80,600 -$38,300 =SUM(B1:B2) =ROUND(PV(11%,4,-1,0,0),5) [Rounded-off to 5 decimal places] =B3*B4 -$129,984 =SUM(B5:36)