9-4 (NPV, PI, and IRR calculations) Fijisawa Inc



9-4 (NPV, PI, and IRR calculations) Fijisawa Inc. is considerinf 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 incremental free cash flows of $450,000 per year for 6 years. The appropiate 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?

a. NPV = [pic] - $1,950,000

= $450,000 (4.486) - $1,950,000

= $2,018,700 - $1,950,000 = $68,700

b. PI = [pic]

= 1.0352

c. $1,950,000 = $450,000 [PVIFAIRR%,6 yrs]

4.333 = PVIFAIRR%,6 yrs

IRR = about 10% (10.1725%)

d. Yes, the project should be accepted.

10-4 (Calculating free cash flows) Visible Fences is introducing a new product and has an expected change in EBIT of $900,000. Visible Fences has a 34 percent marginal tax rate. This project will also produce $300,000 of depreciation per year. In addition, in year 1 this project will also cause the following changes:

Accounts Receivable: $55,000 (without project) $63,000 (with project)

Inventory: $55,000 (without project) $70,000 (with project)

Accounts Payable $90,000 (without project) $106,000 (with project)

What is the project's free cash flow in year 1?

Change in net working capital equals the increase in accounts receivable and inventory less the increase in accounts payable = $8,000 + $15,000 - $16,000 = $7,000.

The change in taxes will be EBIT X marginal tax rate = $900,000 X .34 = $306,000.

A project’s free cash flows =

Change in earnings before interest and taxes

- change in taxes

+ change in depreciation

- change in net working capital

- change in capital spending

= $900,000

- $306,000

+ $300,000

- $7,000

- $0

= $887,000

................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download