Wallowa Company is considering a long-term investment project called ZIP. ZIP wi

Question

Wallowa Company is considering a long-term investment project called ZIP. ZIP will require an investment of $135,314. It will have a useful life of 4 years and no salvage value. Annual cash inflows would increase by $85,620, and annual cash outflows would increase by $40,150. The company’s required rate of return is 12%. Click here to view the factor table. (For calculation purposes, use 5 decimal places as displayed in the factor table provided.) Calculate the internal rate of return on this project and use the table above to complete the answer. (Round answers to 0 decimal places, e.g. 15%.) Internal rate of return on this project is between % and %. Determine whether this project should be accepted?

Explanation / Answer

Inctremental Net Annual Cash Inflows Annual cash inflows would increase $ 85,620.00 annual cash outflows would increase $ 40,150.00 Inctremental Net Annual Cash Inflows $ 45,470.00 Useful Life 4 years Annuity Factor for 4 years @ 12% 3.03735 Present Value of Incremental Net Cash Inflows $     138,108 Outflow at Year 0 $     135,314 Net Present value $        2,794 Annuity Factor for 4 years @ 16% 2.79818 Present Value of Incremental Net Cash Inflows 127233 Outflow at Year 0 $     135,314 Net Present value $       (8,081) Change in DF rate (16-12) 4% Change in NPV $     (10,875) Change in NPV per 1% $       (2,719) At IRR, NPV would be Zero So DF would change for $2794 = 2794/2719 1.03 So IRR = 12+1.03 = 13.03% or say 13%

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