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

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 Valu 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 Value

Explanation / Answer

1. NET PRESENT VALUE

YEAR (A)

CASH FLOW (B)

PRESENT VALUE FACTOR @ 7%

DICOUNTED CASH FLOWS

1

$90000

0.9346

$84114

2

$90000

0.8734

$78606

3

$90000

0.8163

$73467

4

$90000

0.7629

$68661

5

$90000

0.713

$64170

6

$90000

0.6663

$59967

7

$90000

0.6227

$56043

8

$90000

0.582

$52380

DISCOUNTED INFLOW

$537408

DISCOUNTED OUTFLOW

$900000

NET PRESENT VALUE

$(362592)

2. THE INTERNAL RATE OF RETURN MAY BE GREATER THAN 7%

3.NET PRESENT VALUE

YEAR (A)

CASH FLOW (B)

PRESENT VALUE FACTOR @ 14%

DICOUNTED CASH FLOWS

1

$90000

0.8772

$78948

2

$90000

0.7695

$69255

3

$90000

0.675

$60750

4

$90000

0.5921

$53289

5

$90000

0.5194

$46746

6

$90000

0.4555

$40995

7

$90000

0.3996

$35964

8

$90000

0.3505

$31545

DISCOUNTED INFLOW

$417492

DISCOUNTED OUTFLOW

$900000

NET PRESENT VALUE

($482508)

1. NET PRESENT VALUE

YEAR (A)

CASH FLOW (B)

PRESENT VALUE FACTOR @ 7%

DICOUNTED CASH FLOWS

1

$90000

0.9346

$84114

2

$90000

0.8734

$78606

3

$90000

0.8163

$73467

4

$90000

0.7629

$68661

5

$90000

0.713

$64170

6

$90000

0.6663

$59967

7

$90000

0.6227

$56043

8

$90000

0.582

$52380

DISCOUNTED INFLOW

$537408

DISCOUNTED OUTFLOW

$900000

NET PRESENT VALUE

$(362592)

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