Question

Wayne Company is considering a long-term investment project called ZIP. ZIP will require an investment of $134,800. It will have a useful life of 4 years and no salvage value. Annual cash inflows would increase by $79,000, and annual cash outflows would increase by $38,000. The company’s required rate of return is 8%. Click here to 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 0 decimal places, e.g. 125. For calculation purposes, use 5 decimal places as displayed in the factor table provided.)

Net present value

Answer 1

Net Cash inflow for the year is calculated below:

Net Cash inflow for the year = Increase in annual cash inflow - Increase in annual cash outflow

= $79,000 - $38,000

= $41,000

Net present value is calculated below:

Years	Annual cash Inflow(A)	Present Value Factor@ 8%(B)	Present Value(A*B)
1	41,000	0.92593	37,963
2	41,000	0.85734	35,151
3	41,000	0.79383	32,547
4	41,000	0.73503	30,136
	Total		$135,797

Net Present value = Total Present,Value - Initial Investment

= $135,797 - $134,800

= $997

Net Present value is positive ($997) because total present value of investment is more than initial investment