Question

​(​NPV,​PI, and IRR calculations​) 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 ​$1,850,000​,and the project would generate incremental free cash flows of $700,000 per year for 6 years. The appropriate required rate of return is 9 percent.

a. Calculate the NPV.

b. Calculate the PI.

c. Calculate the IRR.

d. Should this project be​ accepted?

Answer 1

Fijisawa
Discount rate	9.000%
Year	0	1	2	3	4	5	6
Cash flow stream	-1850000	700000	700000	700000	700000	700000	700000
Discounting factor	1.000	1.090	1.188	1.295	1.412	1.539	1.677
Discounted cash flows project	-1850000.000	642201.835	589175.995	540528.436	495897.648	454951.970	417387.129
NPV = Sum of discounted cash flows
a. NPV Fijisawa =	1290143.01
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
b. PI= (NPV+initial inv.)/initial inv.
=(1290143.01+1850000)/1850000
1.7
Fijisawa
IRR is the rate at which NPV =0
IRR	30.00%
Year	0	1	2	3	4	5	6
Cash flow stream	-1850000.000	700000.000	700000.000	700000.000	700000.000	700000.000	700000.000
Discounting factor	1.000	1.300	1.690	2.197	2.856	3.713	4.826
Discounted cash flows project	-1850000.000	538469.730	414213.785	318630.836	245104.372	188544.692	145036.585
NPV = Sum of discounted cash flows
NPV Fijisawa =	0.000
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
c. IRR=	30.00%

Accept project as NPV is positive