Question

# Vaughn Company is considering a long-term investment project called ZIP. ZIP will require an investment of...

Vaughn Company is considering a long-term investment project called ZIP. ZIP will require an investment of \$122,200. It will have a useful life of 4 years and no salvage value. Annual cash inflows would increase by \$79,700, and annual cash outflows would increase by \$39,000. The company’s required rate of return is 12%. 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

Whether this project should be accepted?

 The project should be rejected/accepted .

Annual Cash Flow from year 1 :

= Increase in Annual Cash Inflow - Increase in Annual Cash Outflow

= 79,700 - 39,000 = 40,700

1. Depreciation is not reduced as it is a non-cash expense.

2. Actually, the cash flows after tax (CFAT) are to be considered for the calculation of NPV. However, due to the absence of information regarding the tax rate, the tax effect has not been considered.

The Net Present Value can be calculated as:

 Annual Cash Flows \$ 40,700 Present Value Factor ( Annuity of 4 years @ 12%) - see not below 3.03738 Discounted Cash Flow [Annual CF x PV Factor] \$ 123,621 Less: Initial Investment \$ 122,200 Net Present Value + 1,421

note : Present Value Factor of Annuity = sum of PV factors for year 1 to 4

= 0.89286 + 0.79720 + 0.71179 + 0.63553 = 3.03738

Since Net Present Value is Positive, The project should be ACCEPTED.

#### Earn Coins

Coins can be redeemed for fabulous gifts.

##### Need Online Homework Help?

Most questions answered within 1 hours.

##### Active Questions
• Distinguish between the typical roles of geologist and engineers in dealing with groundwater problems. How do...
• 5) A rock is thrown directly southeast (45 degrees to S and E), at an initial...
• If 133.2 kJ of heat are added to 5.80 × 102 g of water at 22.0°C,...
• true/false An unweighted path length measures the number of edges in a graph. Breadth first search...
• Give an example of the effect of interest rate changes on a fixed coupon bond, what...
• Thirty-two small communities in Connecticut (population near 10,000 each) gave an average of x = 138.5...