Question

Pronghorn Company is considering a long-term investment project called ZIP. ZIP will require an investment of $119,410. It will have a useful life of 4 years and no salvage value. Annual cash inflows would increase by $80,800, and annual cash outflows would increase by $40,900. The company’s required rate of return is 12%.

(a)- Calculate the net present value on this project.

(b)- Should the project be accepted?

Answer 1

Calculation of NPV
						12.00%
Year		Capital	Increased cash inflow	Increased cash outflow	Annual Cash flow	PV factor, 1/(1+r)^time	Present values
0		$     (119,410)			$     (119,410)	1.0000	$     (119,410)
1			$        80,800	$       (40,900)	$         39,900	0.8929	$         35,625
2			$        80,800	$       (40,900)	$         39,900	0.7972	$         31,808
3			$        80,800	$       (40,900)	$         39,900	0.7118	$         28,400
4			$        80,800	$       (40,900)	$         39,900	0.6355	$         25,357
					Net Present Value	$           1,780
Since NPV is positive, the project should be accpeted.