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 $1,200,000 $ 120,000 8 years $ 130,000 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. O Greater than 10 Percent Less 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 4. Without making any calculations, determine whether the internal rate of return (IRR) is more or less than 13 percent. More than 13 percent Less than 13 percent Equal to 13 percent

Answer 1

Solution 1:
Initial investment = $1,200,000
ANNUAL NET CASH FLOW = Net Income + Depreciation
Annual net cash flow = $120,000 + [($1,200,000 - $130,000) / 8]
$253750
Salvage = $130,000
Computation of NPV - Merril Corp.
Particulars	Amount	Period	PV Factor (10%)	Present Value
Cash Outflows:
Cost of Investment	$12,00,000	0	1	$     12,00,000
				.
Present Value of Cash Outflows (A)				$     12,00,000
Cash Inflows:
Annual cash inflows	$ 2,53,750	1--8	5.3349	$     13,53,731
Salvage Value	$ 1,30,000	8	0.5644	$          73,372
Present Value of Cash Inflows (B)				$     14,27,103
Net Present Value (B-A)				$       2,27,103
Solution 2:
As NPV is positive at 10%, therefore IRR will be greater than 10%
Solution 3:
Computation of NPV - Merril Corp.
Particulars	Amount	Period	PV Factor (13%)	Present Value
Cash Outflows:
Cost of Investment	$12,00,000	0	1	$     12,00,000
Present Value of Cash Outflows (A)				$     12,00,000
Cash Inflows:
Annual cash inflows	$ 2,53,750	1--8	4.79877	12,17,688
Salvage Value	$ 1,30,000	8	0.37615	$          48,900
Present Value of Cash Inflows (B)				$     12,66,587
Net Present Value (B-A)				$          66,587
Solution 4:
As NPV is positive at 13% discount rate, therefore IRR will be greater than 13%