Do It Review 24-4 Wayne Company is considering a long-term investment project ca

Question

Do It Review 24-4 Wayne Company is considering a long-term investment project called ZIP. ZIP will require an investment of $120,900. It will have a useful life of 4 years and no salvage value. Annual cash inflows would increase by $83,600, and annual cash outflows would increase by $43,300. 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, eg, 1596) 96 and Internal rate of return on this project is between Determine whether this project should be accepted? The project be accepted

Explanation / Answer

Initial Investment = $120,900

Incremental Cash Flow = Incremental Annual Cash Inflow - Incremental Annual Cash Outflow
Incremental Cash Flow = $83,600 - $43,300
Incremental Cash Flow = $40,300

Let IRR of the project be i%

NPV = -$120,900 + $40,300 * PVA of $1 (i%, 4)
0 = -$120,900 + $40,300 * PVA of $1 (i%, 4)
PVA of $1 (i%, 4) = 3.0000

PVA of $1 (12%, 4) = 3.0374
PVA of $1 (13%, 4) = 2.9745

So, Internal Rate of Return on this project is between 12% and 13%

The project should be accepted as its IRR is higher than required rate of return.

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