Fijisawa, Inc. is considering a major expansion of its product line and has esti
ID: 2612323 • Letter: F
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 $2,100,000, and the project would generate cash flows of $410,000 per year for six years. The appropriate discount rate is 3.0 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?
The NPV of the expansion is ______ (Round to the nearest dollar)
Explanation / Answer
A. Calculate the net present value.
NPV = 2,220,888
B. Calculate the profitability index.
Profitability index = Sum of dicounted Cash in-flow / Cost of the project
PI = 2,220,888 / $21,00,000
= 1.05
C. Calculate the internal rate of return.
N,P,V @ 3% = 2,220,888 2,100,000 = 120,888
N.P.V @ 10% =
N.P.V = 1,785,550 - 210,000 = -314,450
IRR = 3% + 120,888 / 435,338 x 7%
= 3% + .2776 x 7%
= 4.94%
D. Should this project be accepted? Why or why not?
Yes this project Can be accepted bnecause theire cash inflow NPV is greter than NPV of cash out flow.
Yes this project Can be accepted bnecause theire P.I is greter than (1.05) 1.
Yes this project Can be accepted bnecause theire IRR is 4.94% is greter than cost of capital.
Year Cash In-flow P.V Factore @3% P.V 0 (2,100,000) 1 (2,100,000) 1 410,000 0.9708 398,028 2 410,000 0.9425 386,425 3 410,000 0.9151 375,191 4 410,000 0.8884 364,244 5 410,000 0.8626 353,666 6 410,000 0.8374 343,334 Total 2,460,000 5.4168 2,220,888Related Questions
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