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.