Question

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 ​$1,800,000​, and the project would generate incremental free cash flows of ​$700,000 per year for 6 years. The appropriate required rate of return is 6 percent.

a. Calculate the NPV.

b. Calculate the PI.

c. Calculate the IRR.

d. Should this project be​ accepted?

Answer 1

Solution :

a. The NPV = $ 1,642,127.0282

b. The PI = 1.9123

c. The IRR = 31.30 %

d. Should this project be​ accepted : Yes

The project should be accepted as

1. The NPV of the project is positive i.e., $ 1,642,127.0282

2. The Profitability Index is greater than 1 i.e., 1.9123

3. The IRR of the project at 31.30 % is greater than the required rate of return of 6 % .

Please find the attached screenshots of the excel sheet containing the detailed calculation for the solution.