Merrill Corp. has the following information available about a potential capital

Question

Merrill Corp. has the following information available about a potential capital investment:   

Initial investment $ 1,800,000 Annual net income $ 200,000 Expected life 8 years Salvage value $ 240,000 Merrill’s cost of capital 10 % Required 1. Calculate the proje dollar.) ects net present value Euture value od1 Present Vall8 0S Presen Vaue Annuityors(Use approprilate factons) from the tables provided. Do not round intermediate calcu lations. Round the final answer to nearest whole 2. Without making any calculaticns, dctermine whether the Internail rate of return (IRR) is more or lcss than 10 porcent. Greatar than 10 Parcant Lees tha1 10 Percer ntermediate 3. Calculete the ret pesent value using to nearest whole dollar) 15 percent ciscoun rete. Emreyalue at S1. Presentwave or Present Vale Annutyof (Use appropriate factonis) from the tables provided. Do net round intermediate ealeulations. Round the final answer

Explanation / Answer

1.Calculate Projects Net Present Value at 10%

Depreciation = ($18,00,000 - $2,40,000) / 8 Years = $1,95,000

(Assumed that Depreciation is based on Straight Line Method)

Cash Flow = Annual Net Income + Depreciation

                   = $2,00,000 + $1,95,000

                   = $3,95,000

Net Present Value

= [$395000 x (PVAF 10%,8 Years) ] + [$240000 x (PVF 10%, 8Years]- $1800000

= [$395000 x 5.33493] + [$240000 x 0.46651] - $1800000

= $4,19,260 (Positive)

Net Present Value = $4,19,260

2.” Internal Rate of Return (IRR) is Grater than 10% “

3.Calculate Projects Net Present Value at 15%

= [$395000 x (PVAF 15%,8 Years) ] + [$240000 x (PVF 15%, 8Years]- $1800000

= [$395000 x 4.48732] + [$240000 x 0.3269] - $1800000

= $50947 (Positive)

Net Present Value = $50947

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