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

Question

Wayne Company is considering a long-term investment project called ZIP. ZIP will require an investment of $133,152. It will have a useful life of 4 years and no salvage value. Annual cash inflows would increase by $84,900, and annual cash outflows would increase by $39,300. The company’s required rate of return is 12%. Click here to view PV table.

Calculate the internal rate of return on this project. (Round answers to 0 decimal places, e.g. 15%.)

Determine whether this project should be accepted?

Explanation / Answer

Net annual cash inflows=Cash inflows-Cash outflows

=(84900-39300)

=$45600

Let irr be x%
At irr,present value of inflows=present value of outflows.

133152=45600/1.0x+45600/1.0x^2+45600/1.0x^3+45600/1.0x^4

Hence x=irr=14%(Approx).

Hence irr is between 13% and 14%

Hence since irr is greater than the required return ;project must be accepted.

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