Merrill Corp. has the following information available about a potential capital
ID: 2480428 • Letter: M
Question
Merrill Corp. has the following information available about a potential capital investment: Initial investment $ 1,600,000 Annual net income $ 250,000 Expected life 8 years Salvage value $ 350,000 Merrill’s cost of capital 10 % Assume straight line depreciation method is used.
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.)
Net Present Value ________
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.)
Net Present Value____________
Required: 1.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.)
Net Present Value ________
2. Without making any calculations, determine whether the internal rate of return (IRR) is more or less than 10 percent. Greater than 10 Percent Less than 10 Percent 3.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.)
Net Present Value____________
4. 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
1./
INITIAL INVESTMENT
= $1600000
ANNUAL NET CASH FLOW
= NET INCOME + DEPERICATION
= $250000 + [($1600000 - $350000) / 8]
= $250000 + $156250
= $406250
SALVAGE VALUE
= $350000
NPV
= -$1600000 + $406250 * PVIFA 10%, 8 PERIODS + $350000 * PVIF 10% *PERIOD
= -$1600000 + $406250 * 5.3349 + $350000 * 0.4665
= -$1600000 + 2167303.13 + $163275
= $730578.13
2./
AS THE NPV IS GREATER THAN 0 OR POSITIVE THE IRR IS GREATER THAN 10%
3./
INITIAL INVESTMENT
= $1600000
ANNUAL NET CASH FLOW
= NET INCOME + DEPERICATION
= $250000 + [($1600000 - $350000) / 8]
= $250000 + $156250
= $406250
SALVAGE VALUE
= $350000
NPV
= -$1600000 + $406250 * PVIFA 20%, 8 PERIODS + $350000 * PVIF 20% *PERIOD
= -$1600000 + $406250 * 3.8372 + $350000 * 0.2326
= -$1600000 + $1558862.5 + $81410
= $40272.5
4./
AS THE NPV IS GREATER THAN 0 OR POSITIVE THE IRR IS GREATER THAN 20%