Do It Review 24-2 Wayne Company is considering a long-term investment project ca

Question

Do It Review 24-2 Wayne Company is considering a long-term investment project called ZIP. ZIP will require an investment of $126,006. It will have a useful life of 4 years and no salvage value. Annual cash inflows would increase by $79,200, and annual cash outflows would increase by $38,900. The company's required rate of return is 10%. Click hereto 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 O decimal places, e.g. 125. For calculation purposes, use 5 decimal places as displayed in the factor table provided.) Net present value Whether this project should be accepted? The project should be

Explanation / Answer

Net Present Value $ 1,740 The project should be accepted Workings: Present Value of annual net cash inflow $       1,27,746 Less:Initial cash investment $       1,26,006 Net Present Value $             1,740 Present value of annual net cash inflows = Net Annual Cash inflows x Cumulative discount factor = $           40,300 x         3.16987 = $       1,27,746 Cumulative discount factor = (1-(1+i)^-n)/i Where, = (1-(1+0.10)^-4)/0.10 i           0.10 =             3.16987 n 4 Annual Net Cash inflows = Annual Cash inflows -Annual cash outflows = $           79,200 - $       38,900 = $           40,300

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