In considering a major expansion of its product line and has

estimated the following free cash cash flows associated with

1.) CALCULATE THE NET PR
such an expansion . The initial outlay associated with the
expansion would be 1,950,000 and the project would generate
2.) CALCULATE THE PROFIT
a free cash flows of 450,000 per year for six years . The appropr
required rate of return is 9 percent .
3.) CALCULATE THE INTER
1 Calculate the net present value
2 Calculate the profitability index
3 Calculate the internal rate of return 4.) SHOULD THIS PROJECT
4 Should this project be accepted ?
SOLUTIONS:

1.) Net Present Value 2

Present Value of Cash Inflows

= Cash flows per year x Present
2,018,700
Value factor
=P 450000 x 4.486

Less: Cost of Investment -1950000

3 Internal Rate of Retu

NET PRESENT VALUE P 68,700

A
PV Factor = [1 - (1/1+.09)^6]/0.09 Year
4.485691859 or 4.486 0
1
2
4.) Yes, this project should be accepted. 3
4
5
6
IRR
CULATE THE NET PRESENT VALUE
P68,700
CULATE THE PROFITABILITY INDEX
1.0352
LCULATE THE INTERNAL RATE OF RETURN
10.17%

ULD THIS PROJECT BE ACCEPTED ? YES

Profitability Index

PI = (450,000 x 4.486) / 1,950,000

1.0352

Internal Rate of Return

B
Cash Flows
(1,950,000.00)
450,000
450,000
450,000
450,000
450,000
450,000
10.1725%