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 $10,800,000, and the project would generate cash flows of $1,250,000 per year for 20 years. The appropriate discount rate is 9.0 percent.

a. Calculate the NPV.

b. Calculate the PI.

c. Calculate the IRR.

d. Should this project be accepted? Why or why not?

Save Homework: HW7 Chapter 11 Score: 0 of 7 pts B11-19 (static) 6 of 7(4 complete) HW Score: 21.54%, 14 of 65 pts Question Help (Related to Checkpoint 11.1 and Checkpoint 114) Calculating NPV, PI, and IRR) Fywa, Inc. is considering a major expansion of product line and has estimated the following cash flows associated with such an expansion. The initial outlay would be $10.800,000, and the project would generate cash flows of $1,250,000 per year for 20 years. The appropriate discount rate is 9.0 percent a. Calculate the NPV b. Calculate the PL c. Calculate the RR d. Should this project be accepted? Why or why not? a. The NPV of the expansion is $ (Round to the nearest dollar) Enter your answer in the answer box and then click Check Answer Check Answer 3 Parts Clear All

Answer 1

a) Calculating NPV:

NPV = present value of future cash flows - initial cash outflow

given,

Initial cash out flow = $10,800,000

Discount rate = 9%

Cash inflow Present value factor @9% present value of cash flows Year 0.91743119266 1250000 1146788.991 1250000 0.84167999327 1052099.992 0.77218348006 1250000 965229.3501 885531.5138 4 1250000 0.70842521107 1250000 0.64993138630 812414.2329 1250000 0.59626732688 745334.1586 1250000 0.54703424484 683792.8061 1250000 0.50186627967 627332.8496 0.46042777952 1250000 575534.7244 528013.5086 10 1250000 0.42241080690 11 1250000 0.38753285036 484416.063 444418.4064 12 1250000 0.35553472510 13 1250000 0.32617864688 407723.3086 14 1250000 0.29924646503 374058.0813 15 1250000 0.27453804131 343172.5516 16 1250000 0.25186976267 314837.2033 17 1250000 0.23107317676 288841.471 18 1250000 0.21199374015 264992.1752 19 1250000 0.19448966986 243112.0873 20 1250000 0.17843088978 223038.6122 Total 11410682.09

Total present value of future cash flows = $11,410,682.09(rounded to two decimals)

So NPV = 11,410,682.09 - 10,800,000 = $610,682.09

B)

Profitability index(PI) = Present value of future cash flows / initial investment

= 11410682.09 / 10,800,000

= 1.0565

C)

IRR is the rate at which NPV of the project will become 0

this can be solved using spread sheet

fe =IRR(B2:B22) B23 Cash inflow Year -10800000 3 1250000 1250000 1250000 6. 4 1250000 1250000 8. 1250000 1250000 10 1250000 11 1250000 12 10 1250000 13 11 1250000 14 12 1250000 15 13 1250000 16 14 1250000 17 15 1250000 18 16 1250000 19 17 1250000 20 18 1250000 21 19 1250000 1250000 22 20 9.785013% 23 IRR 2. 5. 7.

Formula for calculating IRR can be seen above(=IRR(B2:B22))

So IRR = 9.785%( rounded to three decimals)

D)

The project can be accepted because

NPV >0

PI > 1

IRR > given discount rate