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 $2,eee, eee $ 210,000 8 years $ 220,000 101 Assume straight line depreciation method is used, Required: 1. Calculate the project's net present value. 2. Without making any calculations, determine whether the internal rate of return (IRR) is more or less than 10 percent 3. Calculate the net present value using a 15 percent discount rate. 4. Without making any calculations, determine whether the internal rate of return (IRR) is more or less than 15 percent.

Answer 1

Solution 1:

Computation of Annual net Cash Flows
Annual Net Income	$2,10,000
Annual Depreciation [($2,000,000-$220,000)/8]	$2,22,500
Annual Cash Flows	$4,32,500
Computation of NPV - Merrill Corp.
Particulars	Amount
Table or calculator function:	Present Value of $1
Cash Outflows (Beginning of year)	-$20,00,000
n=	0
i=	10%
Present Value	-$20,00,000
Table or calculator function:	Present Value of annuityof $1
Cash Inflow (for next 8 years)	$4,32,500
n=	8
i=	10%
Table Factor	5.33493
Present Value	$23,07,357
Table or calculator function:	Present Value of $1
Cash Inflow (for 8th year)	$2,20,000
n=	8
i=	10%
Table Factor	0.46651
Present Value	$1,02,632
Total Net present value	$4,09,989

Solution 2:

IRR is more than 10%.

Solution 3:

Computation of NPV - Merrill Corp.
Particulars	Amount
Table or calculator function:	Present Value of $1
Cash Outflows (Beginning of year)	-$20,00,000
n=	0
i=	15%
Present Value	-$20,00,000
Table or calculator function:	Present Value of annuityof $1
Cash Inflow (for next 8 years)	$4,32,500
n=	8
i=	15%
Table Factor	4.48732
Present Value	$19,40,766
Table or calculator function:	Present Value of $1
Cash Inflow (for 8th year)	$2,20,000
n=	8
i=	15%
Table Factor	0.32690
Present Value	$71,918
Total Net present value	$12,684

Solution 4:

IRR is more than 15%.