Question

Related to Checkpoint 11.1 and Checkpoint 11.4)(Calculating NPV, PI, and IRR) Fijisawa, Inc. is considering a major expansion of its product line and has estimated the following cash flows associated with such an expansion. The initial outlay would be $10,600,000, and the project would generate cash flows of 51.240,000 per year for 20 years. The appropriate discount rate is 8.6 percent. a. Calculate the NPV. b. Calculate the PL c. Calculate the IRR d. Should this project be accepted? Why or why not?

Answer 1

a. This can be calculated using a financial calculator by inputting the below:

• •   Press the CF button.
• •   CF0= -$10,600,000. Indicate the initial cash flow by a negative sign since it is a cash outflow.
• •   Cash flow for each year should be entered.
• •   Press Enter and down arrow after inputting each cash flow.
• •   After entering the last cash flow cash flow, press the NPV button and enter the discount rate of 8.6%.
• •   Press enter after that. Press the down arrow and CPT buttons to get the net present value.

The net present value is $1,049,580.594.

b.Profitability Index= NPV + Initial investment/ Initial investment

   = $1,049,580.594 +$10,600,000/ $10,600,000

   = $11,649,580.59/ 10,600,000

   =1.09990.

c. This can be calculated using a financial calculator by inputting the below:

• •   Press the CF button.
• •   CF0= -$190,000. Indicate the initial cash flow by a negative sign since it is a cash outflow.
• •   Cash flow for each year should be entered.
• •   Press Enter and down arrow after inputting each cash flow.
• •   After entering the last cash flow cash flow, press the IRR button and the IRR of the project.

The IRR is 9.94%.

d.The project should be accepted since it generates a positive net present value.

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