Question

Company is considering a long-term capital investment project called ZIP. ZIP will require an investment of $120,000, and it will have a useful life of 4 years. Annual net income is expected to be: Year 1, $42,000; Year 2, $40,000; Year 3, $38,000, and Year 4, $36,000. Depreciation is computed by the straight-line method with no salvage value. The company’s cost of capital is 12%.

Required: Compute the net present value for the project. (10 pts)

Answer 1

Net Present Value (NPV) _{Amt in $Year   Cash inflows($) Discounting factor Present value($)}

1 42,000    1/(1.12)^1= 0.89286 37,500

2    40,000    1/(1.12)^2= 0.79719    31,888

3    38,000 1/(1.12)^3= 0.71178 27,048

4 36,000      1/(1.12)^4= 0.63552   22,879  

   Total 119,315 Less÷ Long term  Capital investment    120,000  

NPV    (685)

NPV is negative i.e. $(685)

Note ÷

As nothing said in the question for rounding off.

(a). So for discounting factor 5 digits has been taken for rounding off.

(b). And for present value amount ,it has been rounded to nearest rupees.