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 $ 1,300,000 $ 130,000 8 years $ 140,000 10% 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.) Net Present Value 2. Without making any calculations, determine whether the internal rate of return (IRR) is more or less than 10 percent. Less than 10 Percent Greater than 10 Percent 3. Calculate the net present value using a 13 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.) Net Present Value

Answer 1

WORKING NOTES:		CALCULATION OF THE DEPRECIATION AS PER STRAIGHT LINE METHOD
		Purchase Cost of Machine	$                   13,00,000
		Less: Salvage Value	$                     1,40,000
		Net Value for Depreciation	$                   11,60,000
		Usefule life of the Assets	8 years
		Depreciation per year	$                     1,45,000
		Cash Flow per year = Net Income + Depreciation
		Cash Flow per year = $ 130,000 + $ 145,000
		Cash Flow per year = $ 275,000
SOLUTION : 1
	CACLULATION OF THE PRESENT VALUE WITH COST OF CAPITAL @ 10%
	Years	Cash Outflow / Inflow	PVF of $ 1 @ 10%	Present Value (A XB)
	0	-13,00,000	1.00	$       -13,00,000
	1	2,75,000	0.9091	$           2,50,000
	2	2,75,000	0.8264	$           2,27,273
	3	2,75,000	0.7513	$           2,06,612
	4	2,75,000	0.6830	$           1,87,829
	5	2,75,000	0.6209	$           1,70,753
	6	2,75,000	0.5645	$           1,55,230
	7	2,75,000	0.5132	$           1,41,118
	8	2,75,000	0.4665	$           1,28,290
	8	1,40,000	0.4665	$               65,311
		Present Value		$           2,32,416
SOLUTION : 2
	IRR of the project is greater than 10% because net present value of the project @ 10% is positive.
	Answer = Greater than 10 Percent
SOLUTION : 3
	CACLULATION OF THE PRESENT VALUE WITH COST OF CAPITAL @ 13%
	Years	Cash Outflow / Inflow	PVF of $ 1 @ 13%	Present Value (A XB)
	0	-13,00,000	1.0000	$       -13,00,000
	1	2,75,000	0.8850	$           2,43,363
	2	2,75,000	0.7831	$           2,15,365
	3	2,75,000	0.6931	$           1,90,589
	4	2,75,000	0.6133	$           1,68,663
	5	2,75,000	0.5428	$           1,49,259
	6	2,75,000	0.4803	$           1,32,088
	7	2,75,000	0.4251	$           1,16,892
	8	2,75,000	0.3762	$           1,03,444
	8	1,40,000	0.3762	$               52,662
		Present Value		$               72,324
		Answer = $ 72,324