Sierra Company is considering a long-term capital investment project called ZIP. The project will require an investment of $120,000, and it will have a useful life of 4 years. Annual net income for ZIP is expected to be: Year 1 $12,000; Year 2 $10,000; Year 3 $8,000; and Year 4 $6,000. Depreciation is computed by the straight-line method with no salvage value. The company”s cost of capital is 12%.
Instructions
(a)Compute the annual rate of return for the project.
(b)Compute the cash payback period for the project. (Round to two decimals.)
(c)Compute the net present value for the project. (Round to nearest dollar.)
(d)Should the project be accepted? Why?
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