Question

-Financial Management Principles

1. 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 $1,900,000 and the project would generate cash flows of $450,000 per year for six years, the appropriate discount rate is 9%.

   1. Calculate the net present value.

   2. Calculate the profitability index.

   3. Calculate the internal rate of return.

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

2.Gio’s Restaurants is considering a project with the following expected cash flows.

year	Project cash flow
0	$(150 million)
1	$90 million
2	$70 million
3	$90 million
4	$100 million

If the project’s appropriate discount rate is 12%, what is the project’s discounted payback?

3. Emily’s Soccer Mania is considering building a new plant. This project would acquire an initial cash outlay of $10 million and would generate annual cash inflows of $3million per year for Years 1 through 4.In year 5 the project will acquire an investment outlay of $5,000,000. During Years 6 through 10 the project will provide cash inflows of $5million per year. Calculate the Project’s MIRR given a discount rate of 14 percent

4. Crypton Electronics has a capital structure consisting of 40 percent common stock and 60 percent debt. A debt Issue of $1,000 par value, 6 percent bonds that mature in 15 years and pay annual interest will sell for $975. Common stock of the firm is currently selling for $30 per share and the firm expects to pay a $2.25 dividend next year. Dividends have grown at the rate of 5 percent per year and are expected to continue to do so for the foreseeable future. What is Crypton’s cost of capital where the firm’s tax rate is 30 percent?

Answer 1

1. Ans

Npv is $ 118663.37

PI is 1.06

IRR is 11.07%