Merrill Corp. has the following information available about a potential capital
ID: 2465205 • Letter: M
Question
Merrill Corp. has the following information available about a potential capital investment:
Initial Investment $1,100,000
Annual net Income $110,000
Expected Life 8 years
Salvage Value $120, 000
Merrills cost of capital: 7%
1. Calculate the project’s net present value. Assume straight line depreciation method is used.
2. Calculate the net present value using a 13 percent discount rate. Assume straight line depreciation method is used
Merrill Corp. has the following information available about a potential capital investment:
Initial Investment $1,100,000
Annual net Income $110,000
Expected Life 8 years
Salvage Value $120, 000
Merrills cost of capital: 7%
1. Calculate the project’s net present value. Assume straight line depreciation method is used.
2. Calculate the net present value using a 13 percent discount rate. Assume straight line depreciation method is used
Explanation / Answer
Solution:-
(a) NPV=PVCI-PVCO
PVCO=1,100,000
PVCI=110,000*PVAF(r,n)+120,000*PVF(r,n)
=110,000*PVAF(7%,8 years)+120,000*PVF(7%,8 year)
= 110,000*5.971+120,000*0.582
=$(656810+69840)
= $726650
NPV=PVCI-PVCO =$(726,650-1,100,000) = -$373350
(b) NPV=PVCI-PVCO
PVCO=1,100,000
PVCI=110,000*PVAF(r,n)+120,000*PVF(r,n)
=110,000*PVAF(13%,8 years)+120,000*PVF(13%,8 year)
= 110,000*4.799+120,000*0.376
=$(527,890+45,120)
= $573,010
NPV=PVCI-PVCO =$(573,010-1,100,000) = -$526,990