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

Question

Merrill Corp. has the following information available about a potential capital investment: nitial investment $2,200,000 $ 190,000 Annual net income Expected life Salvage value 8 years $ 200,000 8% 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.) Present Value 2. Without making any calculations, determine whether the internal rate of return (IRR) is more or less than 8 percent. O Less than 8 Percent O Greater than 8 Percent 3. Calculate the net present value using a 12 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.) Present Value 4. Without making any calculations, determine whether the internal rate of return (IRR) is more or less than 12 percent. More than 12 percent Less than 12 percent O Equal to 12 percent

Explanation / Answer

Net Cash Flow = 190,000 + (2,200,000 - 200,000)/ 8

Net Cash Flow = 440,000

NPV at 8%

NPV = -2,200,000 + 440,000/ (1.08)1 + 440,000/ (1.08)2 + 440,000/ (1.08)3 + 440,000/ (1.08)4 + 440,000/ (1.08)5 + 440,000/ (1.08)6 + 440,000/ (1.08)7 + 440,000/ (1.08)8

NPV = 328,521.14

IRR is greater than 8%  

NPV at 12%

NPV = -2,200,000 + 440,000/ (1.12)1 + 440,000/ (1.12)2 + 440,000/ (1.12)3 + 440,000/ (1.12)4 + 440,000/ (1.12)5 + 440,000/ (1.12)6 + 440,000/ (1.12)7 + 440,000/ (1.12)8

NPV = -14,238.50

IRR is less than 12%

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