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

Question

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

Assume straight line depreciation method is used.  

Required:
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.)

3. Calculate the net present value using a 14 percent discount rate. (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.)

Initial investment $ 600,000 Annual net income $ 60,000 Expected life 8 years Salvage value $ 70,000 Merrill’s cost of capital 7 %

Explanation / Answer

1) NPV = Present value of cash inflows - Initial investment Initial investment = $600000 cash inflow per annum = Annual net income + Depreciation Depreciation under straight-line method = (cost of asset-Salvage value)/Useful life Depreciation under straight-line method = (600000-70000)/8 = $66250 cash inflow per annum = 60000+66250 = $126250 Present value of cash inflows = $126250*PVIFA @ 7% 8 years + $70000*PVIF @7% 8 years Present value of cash inflows = $126250*5.9713 + $70000*0.582 Present value of cash inflows = $753876+$40741 = $794617 NPV = $794617 + $600000 = $194617 2) NPV = Present value of cash inflows - Initial investment Initial investment = $600000 cash inflow per annum = Annual net income + Depreciation Depreciation under straight-line method = (cost of asset-Salvage value)/Useful life Depreciation under straight-line method = (600000-70000)/8 = $66250 cash inflow per annum = 60000+66250 = $126250 Present value of cash inflows = $126250*PVIFA @ 14% 8 years + $70000*PVIF @14% 8 years Present value of cash inflows = $126250*4.6389 + $70000*0.3506 Present value of cash inflows = $585657 + $24539 = $610196 NPV = $610196 + $600000 = $10196

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