Question

(NPV, Pl, and IRR calculations) Fijsawa Inc. is considering a major expansion of its product line and has estimated the following cash flows associated with such an expansion. The initial ouay would be $1,800,00, and the project would generate icrtal fee cash flows of $500,000 per year tor 7 years. the appropriate required rate of retum is 9 percent aCalculate the NPV b. Calculate the Pl c. Calculate the IRR. d. Should this project be accepted? a. What is the projects NPV 扣(Round to tho nearest dolar) b. What is the projects Pn (Round to three decimal places) C. What is the project's RR Round to two decimal places) d. Should this project be accepted? (Select the best choice below) O A No The project should be rejncted because the projects NP'V is negative, Pl is less han one and R is s RR is less than the required rate of retum greater than one,and RR is greater than the equined ale of protect should be cted because the proiers May蕁negative. P-less ron one, and O B. Yes The project should be accepted because the project's NPV s postive Plis Click to select your answerls. 318 MacBook Air 888 pa 9 5 6

Answer 1

Initial Outlay = $1,800,000
Annual Cash Inflow = $500,000
Life of Project = 7 years

Answer a.

Required Rate of Return = 9%

Present Value of Cash Inflow = $500,000/1.09 + $500,000/1.09^2 + ... + $500,000/1.09^7
Present Value of Cash Inflow = $500,000 * (1 - (1/1.09)^7) / 0.09
Present Value of Cash Inflow = $2,516,476

NPV = Present Value of Cash Inflow + Initial Cash Outlay
NPV = $2,516,476 - $1,800,000
NPV = $716,476

Answer b.

Profitability Index = Present Value of Cash Inflow / Initial Cash Outlay
Profitability Index = $2,516,476 / $1,800,000
Profitability Index = 1.398

Answer c.

Let IRR be i%

NPV = -$1,800,000 + $500,000/(1+i) + $500,000/(1+i)^2 + ... + $500,000/(1+i)^7
0 = -$1,800,000 + $500,000/(1+i) + $500,000/(1+i)^2 + ... + $500,000/(1+i)^7

Using financial calculator, i = 20.05%

IRR of the project = 20.05%

Answer d.

Yes. The project should be accepted because the project’s NPV is positive, PI is greater than one, and IRR is greater than the required rate of return.