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Fijisawa Inc. is considering a major expansion of its product line and has estimated the following...

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Finance

Fijisawa Inc. is considering a major expansion of its productline and has estimated the following cash flows associated withsuch an expansion. The initial outlay would be

?$1,850,000

and the project would generate incremental free cash flowsof

?$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 & Explanation Solved by verified expert
4.0 Ratings (478 Votes)

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%

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Transcribed Image Text

Fijisawa Inc. is considering a major expansion of its productline and has estimated the following cash flows associated withsuch an expansion. The initial outlay would be?$1,850,000and the project would generate incremental free cash flowsof?$700,000per year for66years. The appropriate required rate of return is88percent.a. Calculate theNPV.b. Calculate thePI.c. Calculate theIRR.

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