Merrill Corp. has the following information available about a potential capital
ID: 2409819 • Letter: M
Question
Merrill Corp. has the following information available about a potential capital investment: Initial investment Annual net income Expected life Salvage value Merrill's cost of capital $ 900,000 $ 90,000 8 years $ 100,000 7% 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 fa final answer to nearest whole dollar:) Net Present Value 2. Without making any calculations, determine whether the internal rate of return (IRR) is more or less than 7 percent. O Less than 7 Percent O Greater than 7 Percent 3. Calculate the net present value using a 14 percent discount rate. (Future Value of $1. Present Value of $1, Future Value Annuity of $1 calculations. Round the final answer to nearest whole dollar.) of $1 Net Present ValueExplanation / Answer
Answer to Part 1.
Net Cash Flow = Annual Net Income + Depreciation per Year
As per Straight Line Method, Depreciation per Year = (Cost – Salvage Value) / Useful Life
Depreciation per Year = (900,000 – 100,000) / 8
Depreciation per Year = $100,000
Net Cash Flow = $90,000 + $100,000
Net Cash Flow = $190,000
Net Present Value = PV of Cash Inflow – Initial Investment
PV of Cash Inflow = Net Cash Flow * PVIFA (7%, 8)
PV of Cash Inflow = $190,000 * 5.9713
PV of Cash Inflow = $1,134,547
Net Present Value = $1,134,547 - $900,000
Net Present Value = $234,547
Answer to Part 2.
IRR would be greater than 7%, as it has positive Net Present Value at a rate of 7%.
Answer to Part 3.
Net Cash Flow = Annual Net Income + Depreciation per Year
As per Straight Line Method, Depreciation per Year = (Cost – Salvage Value) / Useful Life
Depreciation per Year = (900,000 – 100,000) / 8
Depreciation per Year = $100,000
Net Cash Flow = $90,000 + $100,000
Net Cash Flow = $190,000
Net Present Value = PV of Cash Inflow – Initial Investment
PV of Cash Inflow = Net Cash Flow * PVIFA (14%, 8)
PV of Cash Inflow = $190,000 * 4.6389
PV of Cash Inflow = $881,384
Net Present Value = $881,384 - $900,000
Net Present Value = -$18,616