Wayne Company is considering a long-term investment project called ZIP. ZIP will
ID: 2498693 • Letter: W
Question
Wayne Company is considering a long-term investment project called ZIP. ZIP will require an investment of $120,497. It will have a useful life of 4 years and no salvage value. Annual cash inflows would increase by $88,200, and annual cash outflows would increase by $47,900. 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%.)
Internal rate of return on this project is between % and %.
Determine whether this project should be accepted?
The project
should
should not
be accepted.
Explanation / Answer
From the given information:
Present value of Initial investment = $ 120,497
Net Annual cash flows= Cash Inflows- cash outflows = 88,200 - 47,900 = $40,300
Calculation of NPV as below:
From the above table :
NPV @ 10% = 7,214
NPV @ 14% = -3,143.40
Calculation of Internal rate of return of Project (IRR) :
IRR = L1 + {[NPV@L1-NPV@L2]/NPV@L1}* (L2-L1)
= 10% + {[7,214-3,134]/7,214} *(14-10)
= 10% + 0.565 * 4
= 10% + 2.26
= 12.26%
= 12% round off.
Note: Here L1 is first guess rate i.e. 10% & L2 is 2nd guess rate is 14%
Conclusion: Since rounded off IRR is 12% which is equal to Company's required rate of return. It is not suggested
to accept the project. Because cash inflows & cash outflows both are same and no single penny of
profit remains over there.
Hence, Project should not be accepted.
Year Net Annual cash flow Present Value discounting factor @10% Present Value@10% Present Value discounting factor @14% Present Value@14% 1 40300 0.909 36632.7 0.877 35343.1 2 40300 0.826 33287.8 0.769 30990.7 3 40300 0.751 30265.3 0.674 27162.2 4 40300 0.683 27524.9 0.592 23857.6 Total 127710.7 117353.6 Less: Initial investment 1,20,497 120497 NPV 7,214 -3143.4Related Questions
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