Merrill Corp. has the following information available about a potential capital
ID: 2533105 • 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 $2,100,000 $ 200,000 8 years $210,000 10% Assume straight line depreciation method is used. 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 ValueExplanation / Answer
Question 1). Solution :- Operating cash flow = Net income + Depreciation (Non cash expense).
= 200000 + (2100000 - 210000) / 8
= 200000 + 236250
= $ 436250.
Present value of cash inflow = Present value of operating cash flow + Present value of salvage value.
= 436250 * [ 1 - (1.10)-8 ] / 0.10 + 210000 / (1.10)8
= 436250 * [ 1 - 0.4665 ] / 0.10 + 210000 / 2.1436
= 436250 * 0.5335 / 0.10 + 210000 / 2.1436
= 2327393.75 + 97966.04
= $ 2425359.79
Present value of cash outflow = $ 2100000 (Given in the question)
Net present value (NPV) = 2425359.79 - 2100000.
= $ 325359.79 (approx).
Question 3). Solution :- Operating cash flow = Net income + Depreciation (Non cash expense).
= 200000 + (2100000 - 2100000) / 8
= $ 436250.
Present value of cash inflow = Present value of operating cash flow + Present value of salvage value.
= 436250 * [ 1 - (1.13)-8 ] / 0.13 + 2100000 / (1.13)8
= 436250 * [ 1 - 0.3762 ] / 0.13 + 210000 / 3.004
= 436250 * 0.6238 / 0.13 + 210000 / 3.004
= 436250 * 4.7985 + 210000 / 3.004
= 2093328.85 + 69906.79
= $ 2163235.64
Present value of cash outflow = $ 2100000 (Given in the question)
Net present value (NPV) = 2163235.64 - 2100000.
= $ 63235.64 (approx)
Conclusion :-
1). Net present value (When the discount rate is 10 %) $ 325359.79 (approx) 3). Net present value (When the discount rate is 13 %) $ 63235.64 (approx)