Final answer:
To assess the investment project called ZIP, one needs to calculate its NPV by discounting the net cash inflows at the company's required rate of 12%, then subtracting the initial investment. The PI is determined by the ratio of the present value of inflows to the initial investment, guiding the decision on whether to accept the project.
Step-by-step explanation:
The student has asked to calculate the net present value (NPV) of a long-term investment project called ZIP and discuss its acceptability. The project requires an initial investment of $120,000, has a lifespan of 4 years with no salvage value, and expects an annual increase in cash inflows of $80,000 and outflows of $40,000. The company's required rate of return is 12%. To calculate the NPV, we first need to determine the annual net cash inflow, which is the inflows minus the outflows, giving us $40,000. Next, the present value of each year's cash inflow needs to be computed using the discount rate of 12%. Once all present values are calculated, they are summed to find the total present value of the cash inflows. We then subtract the initial investment from this total to find the NPV.
For the profitability index (PI), we divide the present value of future cash inflows by the initial investment. If the NPV is positive and the PI is greater than 1, the project should be accepted as it will return more than the required rate. If either or both are negative or less than 1, the project should not be accepted as it doesn't meet the required rate of return.