Merril Corp. has the tollowing intormation avalable about a potential capital in
ID: 2525305 • Letter: M
Question
Merril Corp. has the tollowing intormation avalable about a potential capital inves ment 5 1,900,000 5 190,000 Initial investment nnual net incone Expected lIf 8 years 5 230,000 Merrill's cost of capital 10% Assume straight line depreciation method is used. Required: 1. Calculate the projects net present value (Future alle the final answer to nearest whole dollar.) 1 Present a ue ?Future a ue n u si Present vali e nni y 1 ) (Use appropriate factor(s) from the tables provided. Do not round intermediate calculations. Round t Value 2. Wthout 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 3. Coculate the net present value using a 14 percent discount rote. Euture Valueof S1. Prescnt Value oL S1. E calculations. Round the final answer to nearest whole dollar.) y OLS1 Present Value Arinuily of S1) (Use appropriate factor(s) from the tables provided. Do not round intermediateExplanation / Answer
Annual depreciation = 1900000/8 = 237500
Operating cash flow = Net income + depreciation
= 190000 + 237500
= 427500
8th year cash flow will be = 427500 + salvage value
= 427500 + 230000
= $657500
NPV is the difference between present value of all cash inflow and initial cost of asset or project.
All the future cash flows are discounted using discounting rate or required rate and the sum of all the discounted cash flows will be subtracted with initial cost.
NPV = PV of future cash inflow - initial cost
Pls refer below table for NPV calculation,
Year
Cash Inflow
PV factor
PV of cash flow
1
427500
0.909091
388636.3636
2
427500
0.826446
353305.7851
3
427500
0.751315
321187.0774
4
427500
0.683013
291988.2522
5
427500
0.620921
265443.8656
6
427500
0.564474
241312.6051
7
427500
0.513158
219375.0955
8
657500
0.466507
306728.6025
Total
2387977.647
Initial cost
1900000
NPV
487977.6471
Internal rate of return is the rate at which if we discount all the future cash flows, the resulting NPV will be zero, it is minimum rate of return that management seeks from the project, IRR of te asset/project must be greater than the required rate of return, otherwise it will not be feasible for the management to accept the project. Best way to calculate IRR is using Excel.
Year
Cash flow
0
-1900000
1
427500
2
427500
3
427500
4
427500
5
427500
6
427500
7
427500
8
657500
IRR
16.42%
Formula
=IRR(J21:J31)
IRR is more than 10% because NPV is positive.
NPV if required rate is 14%
Year
Cash Inflow
PV factor
PV of cash flow
1
427500
0.877193
375000
2
427500
0.769468
328947.3684
3
427500
0.674972
288550.3232
4
427500
0.592080
253114.3186
5
427500
0.519369
222030.104
6
427500
0.455587
194763.2491
7
427500
0.399637
170844.9554
8
657500
0.350559
230492.5786
Total
2063742.897
Initial cost
1900000
NPV
163742.8973
Year
Cash Inflow
PV factor
PV of cash flow
1
427500
0.909091
388636.3636
2
427500
0.826446
353305.7851
3
427500
0.751315
321187.0774
4
427500
0.683013
291988.2522
5
427500
0.620921
265443.8656
6
427500
0.564474
241312.6051
7
427500
0.513158
219375.0955
8
657500
0.466507
306728.6025
Total
2387977.647
Initial cost
1900000
NPV
487977.6471