Question

Coronado 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 $79,800, and annual cash outflows would increase by $39,900. The company’s required rate of return is 11%. 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 or accepted .

Answer 1

NPV = Present value of cash inflows – Present value of cash outflows

= (79800-39900)*PVAF(11%, 4 years) – 122,200

= 39900*3.10245 -122,200

= $1,587.755

i.e. $1,588

The project should be ACCEPTED as the NPV is positive