Question

In: Finance

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

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?

Solutions

Expert Solution

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.

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