Question

​(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 ​$11,100,000​, and the project would generate cash flows of ​$1,290,000 per year for 20 years. The appropriate discount rate is 8.1 percent.

a. Calculate the NPV.

b. Calculate the PI.

c. Calculate the IRR.

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

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a. The NPV of the expansion is ​$(?). (Round to the nearest​ dollar.)

b. The profitability index of the expansion is (?). ​(Round to two decimal​ places.)

c. The IRR of the expansion is (?)​%. (Round to two decimal​ places.)

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

(No,Yes)​ because the NPV is (negative, positive)​, the IRR is (greater, less than) the required discount​ rate, and the PI is (greater, less

than) 1.

Answer 1

Year	Cash flow
0	-$11,100,000
1	1,290,000
2	1,290,000
3	1,290,000
4	1,290,000
5	1,290,000
6	1,290,000
7	1,290,000
8	1,290,000
9	1,290,000
10	1,290,000
11	1,290,000
12	1,290,000
13	1,290,000
14	1,290,000
15	1,290,000
16	1,290,000
17	1,290,000
18	1,290,000
19	1,290,000
20	1,290,000
Discount rate	8.10%
NPV	1,471,712
PI	1.13
IRR	9.84%

Decision:
Yes, because the NPV is positive, the IRR is greater than the required discount rate, and the PI is greater than 1.

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