Do It! Review 12-3 Wallowa Company is considering a long-term investment project

Question

Do It! Review 12-3 Wallowa Company is considering a long-term investment project called ZIP. ZIP will require an investment of $121,858. It will have a useful life of 4 years and no salvage value. Annual cash inflows would increase by $82,160, and annual cash outflows would increase by $40,640. The company's required rate of return is 12%. (Refer the below table) TABLE 4 Present Value of an Annuity of 1 Payments 7% 94340 0.93458 .92593 91743 .90909 90090 .89286 86957 1.88609 1.85941 1.83339 1.80802 1.78326 .759 1.73554 1.71252 1.69005 1.62571 2.77509 2.72325 2.6730 2.62432 2.57710 2.53130 2.48685 2.44371 2.40183 2.28323 3.62990 3.54595 3.46511 3.38721 3.31213 3.23972 3.16986 3.10245 3.03735 2.85498 4.45182 4.32948 4.21236 4.10020 3.99271 3.88965 3.79079 3.69590 3.60478 3.35216 5.24214 5.07569 4.91732 4.76654 4.62288 4.48592 4.35526 4.23054 4.11141 3.78448 6.00205 5.78637 5.58238 5.38929 5.20637 5.03295 4.86842 4.71220 4.56376 4.16042 6.73274 6.46321 6.20979 5.97130 5.74664 5.53482 5.33493 5.14612 4.96764 4.48732 7.43533 7.10782 6.80169 6.51523 6.24689 5.99525 5.75902 5.53705 5.32825 4.77158 8.11090 7.72173 7.360097.02358 6.71008 6.41766 6.14457 5.88923 5.65022 5.01877 8.76048 8.30641 7.88687 7.49867 7.13896 6.80519 6.49506 6.20652 5.93770 5.23371 9.38507 8.86325 8.38384 7.94269 7.53608 7.16073 6.81369 6.49236 6.19437 5.42062 9.98565 9.39357 8.85268 8.35765 7.90378 7.48690 7.10336 6.74987 6.42355 5.58315 10.56312 9.89864 9.29498 8.74547 8.24424 7.78615 7.36669 6.98187 6.62817 5.72448 11.11839 10.37966 9.71225 9.10791 8.55948 8.06069 7.60608 7.19087 6.81086 5.84737 11.65230 10.83777 10.10590 9.44665 8.85137 8.31256 7.82371 7.37916 6.97399 5.95424 12.16567 11.27407 10.47726 9.76322 912164 8.54363 8.02155 7.54879 7.11963 6.04716 12.65930 11.68959 10.82760 10.05909 9.37189 8.75563 8.20141 7.701627.24967 6.12797 1 12 13 1 17

Explanation / Answer

Calculation of IRR Project First Cost Incremental Annual Cash inflow Incremental Annual Cash outflow Net Incremental Annual Cash inflow Life (years) Factor of IRR IRR A B C D= B-C C A/D E ZIP $121,858 $82,160 $40,640 $41,520 4 2.9349 Between 13% and 14% The factor of IRR is then located in the present value tables to see what rate of return it represents. Internal Rate of return on this project is between 13% and 14% (As computed above) Answer 2. Required Rate of return = 12% IRR is betwwen 13% and 14%, which is above the Required rate of Return. (IRR shows that the rate of interest at which NPV is 0) So, Project Zip should not be accepted

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