Merrill Corp. has the following information available about a potential capital
ID: 2532901 • Letter: M
Question
Merrill Corp. has the following information available about a potential capital investment Initial investment Annual net income Expected life Salvage value Merrill's cost of capital $1,400,000 $ 140,000 8 years $ 150,000 10% Assume straight line depreciation method is used Requirec 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.) Net Present Value 2. Without making any calculations, determine whether the internal rate of return (IRR) is more or less than 10 percent. O Less than 10 Percent O Greater than 10 Percent 3. Calculate the net present value using a 13 percent discount rate. (Future Value of $1, Present Value of $1, $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.) Net Present Value 4. Without making any calculations, determine whether the internal rate of return (IRR) is more or less than 13 percent. O More than 13 percent O Less than 13 percent O Equal to 13 percentExplanation / Answer
Solution 1:
Initial investment = $1,400,000
Annual net income = $140,000
Expected life = 8 years
Salvage value = $150,000
Annual depreciation = ($1,400,000 - $150,000) / 8 = $156,250
Annual cash inflows = Net Income + Depreciation = $140,000 + $156,250 = $296,250
Solution 2:
As NPV is positive at 10%, therefore IRR will be greater than 10%
Solution 3:
Solution 4:
As NPV is positive at 13% discount rate, therefore IRR will be greater than 13%
Computation of NPV - Merril Corp. Particulars Amount Period PV Factor (10%) Present Value Cash Outflows: Cost of Investment $1,400,000.00 0 1 $1,400,000 Present Value of Cash Outflows (A) $1,400,000 Cash Inflows: Annual cash inflows $296,250.00 1-8 5.334926 $1,580,472 Salvage Value $150,000.00 8 0.466507 $69,976 Present Value of Cash Inflows (B) $1,650,448 Net Present Value (B-A) $250,448