Merrill Corp. has the following information available about a potential capital
ID: 2417962 • Letter: M
Question
Merrill Corp. has the following information available about a potential capital investment: Initial investment Assume straight line depreciation method is used. Required: Calculate the project's net present value. Assume straight line depreciation method is used. (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.) Without making any calculations, determine whether the internal rate of return (IRR) is more or less than 10 percent. Less than 10 Percent Greater than 10 Percent Calculate the net present value using a 20 percent discount rate. Assume straight line depreciation method is used. (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.) Without making any calculations, determine whether the internal rate of return (IRR) is more or less than 20 percent. More than 20 percent Less than 20 percent Equal to 20 percentExplanation / Answer
IRR would be greater than 10%
At 20%
Years 0 1 2 3 4 5 6 7 8 Initial Outflow -1600000 Inflows 250,000.00 250,000.00 250,000.00 250,000.00 250,000.00 250,000.00 250,000.00 250,000.00 Salvage value 350,000.00 Dep 200,000.00 200,000.00 200,000.00 200,000.00 200,000.00 200,000.00 200,000.00 200,000.00 Net cash inflow 450,000.00 450,000.00 450,000.00 450,000.00 450,000.00 450,000.00 450,000.00 800,000.00 PVIF@10% 0.909090909 0.826446281 0.751314801 0.683013455 0.620921323 0.56447393 0.513158118 0.46650738 PV 409,090.91 371,900.83 338,091.66 307,356.05 279,414.60 254,013.27 230,921.15 373,205.90 2,563,994.37 NPV 963,994.37IRR would be greater than 10%
At 20%
Years 0 1 2 3 4 5 6 7 8 Initial Outflow -1600000 Inflows 250,000.00 250,000.00 250,000.00 250,000.00 250,000.00 250,000.00 250,000.00 250,000.00 Salvage value 350,000.00 Dep 200,000.00 200,000.00 200,000.00 200,000.00 200,000.00 200,000.00 200,000.00 200,000.00 Net cash inflow 450,000.00 450,000.00 450,000.00 450,000.00 450,000.00 450,000.00 450,000.00 800,000.00 PVIF@10% 20% 0.833333333 0.694444444 0.578703704 0.482253086 0.401877572 0.33489798 0.279081647 0.23256804 PV 375,000.00 312,500.00 260,416.67 217,013.89 180,844.91 150,704.09 125,586.74 186,054.43 1,808,120.73 NPV 208,120.73 IRR would be greater than 20%