Question

Question 2 (of 2) ? | Save & Exit | | Submit 2. value 9.00 points Merrill Corp. has the following information available about a potential capital investment: Initial investment Annual net income Expected life Salvage value Mermill's cost of capital $1,300,000 S 130,000 8 years S 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 S1, Future Value Annulity of1, Present Value Annuilty of $1.) (Use appropriate factorís) from the tables provided. Do not round intermediate calculations. Round the final answer to nearest whole dollar.) 2. Wwithout making any calculations, determine whether the intermal ate of return (RR) is more or less than 10 percent. Greater than 10 Percent Less than 10 Percent

Answer 1

Initial Investment = $1,300,000
Salvage Value = $140,000
Expected Life = 8 years

Annual Depreciation = (Initial Investment - Salvage Value) / Expected Life
Annual Depreciation = ($1,300,000 - $140,000) / 8
Annual Depreciation = $145,000

Annual Cash Flow = Annual Net Income + Annual Depreciation
Annual Cash Flow = $130,000 + $145,000
Annual Cash Flow = $275,000

Answer 1.

Cost of Capital = 10%

Net Present Value = -$1,300,000 + $275,000 * PVA of $1 (10%, 8)
Net Present Value = -$1,300,000 + $275,000 * 5.3349
Net Present Value = $167,097.50

Answer 2.

NPV at 10% is positive. So, IRR is greater than 10%

Answer 3.

Cost of Capital = 13%

Net Present Value = -$1,300,000 + $275,000 * PVA of $1 (13%, 8)
Net Present Value = -$1,300,000 + $275,000 * 4.7988
Net Present Value = $19,670

Answer 4.

NPV at 13% is positive. So, IRR is greater than 13%