Merrill Corp. has the following information available about a potential capital

Question

Merrill Corp. has the following information available about a potential capital investment:   

Assume straight line depreciation method is used.  


Required:
1. Calculate the project’s net present value. (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1.) (Use appropriate factor(s) from the tables provided. Do not round intermediate calculations. Round the final answer to nearest whole dollar.)

         

2. Calculate the net present value using a 10 percent discount rate. (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1.) (Use appropriate factor(s) from the tables provided. Do not round intermediate calculations. Round the final answer to nearest whole dollar.)

       

Initial investment $ 2,400,000 Annual net income $ 170,000 Expected life 8 years Salvage value $ 180,000 Merrill’s cost of capital 8 %

Explanation / Answer

Depreciation = ( original value- salavge value)/estimated useful life (2,400,000-180,000)/8 277500 net annual cash flow net income 170,000 Add:Depreciation for the year 277500 net annual cash flow 447,500 Required 1 year 0 1-----7 8 Initial investment -2,400,000 annual net cash flow 447,500 447,500 salvage value 180,000 total -2,400,000 447500 627500 discount fator (8%) 1 5.20637 0.54027 present value -2400000 2329851 339019.4 268870 net present value 268,870 Required 2 year 0 1-----7 8 Initial investment -2,400,000 annual net cash flow 447,500 447,500 salvage value 180,000 total -2,400,000 447500 627500 discount fator (10%) 1 4.86842 0.46651 present value -2400000 2178618 292735 71352.98 net present value 71,353

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