Question

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 . |

Answer #1

**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.**

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