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

​$1,850,000

and the project would generate incremental free cash flows of

​$700,000

per year for

66

years. The appropriate required rate of return is

88

percent.

a. Calculate the

NPV.

b. Calculate the

PI.

c. Calculate the

IRR.

Answer 1

Project
Discount rate	8.000%
Year	0	1	2	3	4	5	6
Cash flow stream	-1850000	700000	700000	700000	700000	700000	700000
Discounting factor	1.000	1.080	1.166	1.260	1.360	1.469	1.587
Discounted cash flows project	-1850000.000	648148.148	600137.174	555682.569	514520.897	476408.238	441118.739
NPV = Sum of discounted cash flows
a. NPV Project =	1386015.76
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
b. PI= (NPV+initial inv.)/initial inv.
=(1386015.76+1850000)/1850000
1.749

c. Project
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 Project =	0.000
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
IRR=	30.00%