Merrill Corp. has the following information available about a potential capital
ID: 2523144 • Letter: M
Question
Merrill Corp. has the following information available about a potential capital investment:
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 factor(s) from the tables provided. Do not round intermediate calculations. Round the final answer to nearest whole dollar.)
2. Without making any calculations, determine whether the internal rate of return (IRR) is more or less than 10 percent.
Less than 10 Percent
OR
3. Calculate the net present value using a 13 percent discount rate. (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. Do not round intermediate calculations. Round the final answer to nearest whole dollar.)
4. Without making any calculations, determine whether the internal rate of return (IRR) is more or less than 13 percent.
More than 13 percent
OR
Less than 13 percent
OR
Initial investment $ 1,500,000 Annual net income $ 150,000 Expected life 8 years Salvage value $ 160,000 Merrill’s cost of capital 10 %Explanation / Answer
(1). Net present value pf the project = $268480
Explanation;
First of all let’s calculate annual cash flows;
Annual cash flow = Annual net income + Depreciation
Annual net income is given = $150000
Depreciation ($1500000 – $160000) / 8 = $167500
Thus annual cash flow ($150000 + $167500) = $317500
Now let’s calculate project’s net present value;
Year
Annual cash flows
Discounting factor @ 10%
Present value
0
($1500000)
1
($1500000)
1
$317500
(1 + 0.10)1
$288636.36
2
$317500
(1 + 0.10)2
$262396.69
3
$317500
(1 + 0.10)3
$238542.45
4
$317500
(1 + 0.10)4
$216856.77
5
$317500
(1 + 0.10)5
$197142.52
6
$317500
(1 + 0.10)6
$179220.47
7
$317500
(1 + 0.10)7
$162927.7
8
$477500
(1 + 0.10)8
$222757.27
Net present value of project
$268480.23
(2). IRR is greater than 10%
Explanation;
As we have seen that at 10% net present is more than $0 hence IRR must be greater than 10% because as per rule of IRR NPV should be zero but at 10% NPV is more than zero hence IRR will be greater than 10%.
(3). Net present value pf the project = $83795
Explanation;
First of all let’s calculate annual cash flows;
Annual cash flow = Annual net income + Depreciation
Annual net income is given = $150000
Depreciation ($1500000 – $160000) / 8 = $167500
Thus annual cash flow ($150000 + $167500) = $317500
Now let’s calculate project’s net present value;
Year
Annual cash flows
Discounting factor @ 13%
Present value
0
($1500000)
1
($1500000)
1
$317500
(1 + 0.13)1
$280973.45
2
$317500
(1 + 0.13)2
$248649.07
3
$317500
(1 + 0.13)3
$220043.43
4
$317500
(1 + 0.13)4
$194728.7
5
$317500
(1 + 0.13)5
$172326.28
6
$317500
(1 + 0.13)6
$152501.13
7
$317500
(1 + 0.13)7
$134956.75
8
$477500
(1 + 0.13)8
$179616.33
Net present value of project
$83795.14
(4). IRR is more than 13%
Explanation;
As we have seen that at 13% net present is more than $0 hence IRR must be greater than 13% because as per rule of IRR NPV should be zero but at 13% NPV is more than zero hence IRR will be greater than 13%.
Year
Annual cash flows
Discounting factor @ 10%
Present value
0
($1500000)
1
($1500000)
1
$317500
(1 + 0.10)1
$288636.36
2
$317500
(1 + 0.10)2
$262396.69
3
$317500
(1 + 0.10)3
$238542.45
4
$317500
(1 + 0.10)4
$216856.77
5
$317500
(1 + 0.10)5
$197142.52
6
$317500
(1 + 0.10)6
$179220.47
7
$317500
(1 + 0.10)7
$162927.7
8
$477500
(1 + 0.10)8
$222757.27
Net present value of project
$268480.23