(Related to Checkpoint 11.1 on page 335 and Checkpoint 11.4 on page 344) (NPV, P
ID: 2655574 • Letter: #
Question
(Related to Checkpoint 11.1 on page 335 and Checkpoint 11.4 on page 344) (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 $1,950,000, and the project would generate cash flows of
$450,000 per year for six years. The appropriate discount rate is 9 percent.
a. Calculate the net present value.
b. Calculate the profitability index.
c. Calculate the internal rate of return.
d. Should this project be accepted? Why or why not?
Explanation / Answer
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 $1,950,000, and the project would generate cash flows of
$450,000 per year for six years. The appropriate discount rate is 9 percent.
a. Calculate the net present value.
Net present value = -Initial Outlay + Annual Cash flow*PVA(rate,nper)
Net present value = -1950000 + 450000*PVA(9%,6)
Net present value = -1950000 + 450000*4.4859186
Net present value = $ 68,663.37
b. Calculate the profitability index.
Profitability index = 1 + Net present value/Initial Outlay
Profitability index = 1 + 68663.37/1950000
Profitability index = 1.035
c. Calculate the internal rate of return.
Internal rate of return = rate(nper,pmt,pv,fv)
Internal rate of return = rate(6,450000,-1950000,0)
Internal rate of return =10.17%
d. Should this project be accepted? Why or why not?
This project should be accepted because its NPV is Positive , Profitable Index is greater than 1 & Internal Rate of Return is higher than discount rate
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