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 $2,100,000 $ 200,000 8 years $ 210,000 10% 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 13 percent discount rate. 4. Without making any calculations, determine whether the internal rate of return (IRR) is more or less than 13 percent. Complete this question by entering your answers in the tabs below. Req 1 and 2 Req 3 and 4 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.) 2. Without making any calculations, determine whether the internal rate of return (IRR) is more or less than 10 percent. Show less A 1. Net Present Value 2. Internal Rate of Return (IRR) < Req 1 and 2 Req 3 and 4 >

Answer 1

1	Net Present Value	=	$     3,25,315
2	More than 10% (As NPV is positive at 10% Cost of capital)
3	Net Present Value	=	$         72,479
4	More than 13% (As NPV is positive at 13% Cost of capital)
	Workings:
1		Year	Value Flows	Present Factor @ 10%	Present Value
	Initial Cost	0	$ -21,00,000	1	$     -21,00,000
	Cash Inflows + Depreciation	1 - 8	$     4,36,250	5.3349	$      23,27,350
	Salvage Value	8	$     2,10,000	0.4665	$            97,965
	Net Present Value				$         3,25,315
	Depreciation	=	($2100000 - $210000) / 8 years
		=	$     2,36,250
3		Year	Value Flows	Present Factor @ 13%	Present Value
	Initial Cost	0	$ -21,00,000	1	$     -21,00,000
	Cash Inflows	1 - 8	$     4,36,250	4.7988	$      20,93,477
	Salvage Value	8	$     2,10,000	0.3762	$            79,002
	Net Present Value				$            72,479
	Depreciation	=	($2100000 - $210000) / 8 years
		=	$     2,36,250