Question

(NPV, PI, and IRR calculations) Fijisawa Inc. is considering a major expansion of its product line and has estimated the following free cash flows associated with such an expansion. The initial outlay would be $1,800,000, and the project would generate incremental free cash flows of $600,000 per year for 5 years. The appropriate required rate of return is 8 percent. a. Calculate the NPV. b. Calculate the Pl. c. Calculate the IRR. d. Should this project be accepted? a. What is the project's NPV? $ (Round to the nearest dollar.) b. What is the project's Pl? (Round to three decimal places.) c. What is the project's IRR? % (Round to two decimal places.) d. Should this project be accepted? (Select the best choice below.) O A. Yes. The project should be accepted because the project's NPV is positive, Pl is greater than one, and IRR is greater than the required rate of return. OB. No. The project should be rejected because the project's NPV is negative, Pl is less than one, and IRR is less than the required rate of return.

Answer 1

NPV = PV of Cash Inflows - PV of Cash Outflows

PI = PV of Cash Inflows / PV of cash Out flows

IRR is the Rate at which PV of Cash Inflows are equal to PV of Cash outflows

If NPV > 0, PI > 1, IRR > Required Ret, Project can be accepted.

NPV & PI:

Year	CF	PVF @8%	Disc CF
1	$ 6,00,000.00	0.9259	$   5,55,555.56
2	$ 6,00,000.00	0.8573	$   5,14,403.29
3	$ 6,00,000.00	0.7938	$   4,76,299.34
4	$ 6,00,000.00	0.7350	$   4,41,017.91
5	$ 6,00,000.00	0.6806	$   4,08,349.92
PV of Cash Inflows			$ 23,95,626.02
PV of Cash Out flows			$ 18,00,000.00
NPV			$   5,95,626.02
PI			1.330903346

IRR:

Year	CF	PVF @19%	Disc CF	PVF @20%	Disc CF
1	$ 6,00,000.00	0.8403	$   5,04,201.68	0.8333	$   5,00,000.00
2	$ 6,00,000.00	0.7062	$   4,23,698.89	0.6944	$   4,16,666.67
3	$ 6,00,000.00	0.5934	$   3,56,049.49	0.5787	$   3,47,222.22
4	$ 6,00,000.00	0.4987	$   2,99,201.25	0.4823	$   2,89,351.85
5	$ 6,00,000.00	0.4190	$   2,51,429.62	0.4019	$   2,41,126.54
PV of Cash Inflows			$ 18,34,580.93		$ 17,94,367.28
PV of Cash Out flows			$ 18,00,000.00		$ 18,00,000.00
NPV			$      34,580.93		$       -5,632.72

IRR = rate at which least +ve NPV + [ NPV at that rate / CHange in NPV due to 1% inc in Disc rate ] * 1%

= 19% + [ 34580.93 / 40213.65 ] * 1%

= 19 % + 0.86%

= 19.86%

Part D:

If NPV > 0, PI > 1, IRR > Required Ret, Project can be accepted.

Project is Accepted.