Merrill Corp. has the following information available about a potential capital
ID: 2567631 • 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 $1,100,000 S 110,000 8 years S 120,000 796 Assume straight line depreciation method is used. Required: 1. Calculate the projecf'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 retum (IRR) is more or less than 7 percent. Greater than 7 Percent O Less than 7 Percent 3. Calculate the net present value using a 13 percent discount rate. (Future Value of S1. Present Value of S1. Future Value Annuity of S1. 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 OLess than 13 percent Equal to 13 percentExplanation / Answer
1) Year Cash inflow PVIF @ 7% PV of Cash inflow 1 232500 0.9346 2,17,290 (110000+122500) 2 232500 0.8734 2,03,075 3 232500 0.8163 1,89,789 4 232500 0.7629 1,77,373 5 232500 0.7130 1,65,769 6 232500 0.6663 1,54,925 7 232500 0.6227 1,44,789 8 232500 0.5820 1,35,317 8 120000 0.5820 69,841 Total 14,58,168 (-) PV of cash outflow -1100000 NPV 3,58,168 Depreciation per annum = (1100000-120000)/8 = 122500 2) Greater than 7 percent (because the NPV @ 7% is positive. When the discount rate is increases the PV of cashflow decreses) 3) Year Cash inflow PVIF @ 13% PV of Cash inflow 1 232500 0.8849558 205752.2 (110000+122500) 2 232500 0.7831467 182081.6 3 232500 0.6930502 161134.2 4 232500 0.6133187 142596.6 5 232500 0.5427599 126191.7 6 232500 0.4803185 111674.1 7 232500 0.4250606 98826.6 8 232500 0.3761599 87457.17 8 120000 0.3761599 45139.18 Total 1160853 (-) PV of cash outflow -1100000 NPV 60853.28 Depreciation per annum = (1100000-120000)/8 = 122500 4) More than 13 percent (because the NPV @ 13% is positive. When the discount rate is increases the PV of cashflow decreses)