Question

Merrill Corp. has the following information available about a potential capital investment:

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.

Initial Investment	1,700,000
Annual Net Income	190,000
Expected Life	8 Years
Salvage Value	250,000
Merill's cost of capital	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 15 percent discount rate.

4. Without making any calculations, determine whether the internal rate of return (IRR) is more or less than 15 percent.

NET PRESENT VALUE IS NOT 397,220!!!!!!!!!!

Answer 1

1. Net Present Value Annual Net Income Salvage value Net cash Flows Initial Investment -$17,00,000.00 $0.00 Present value of $1 @10% Present value of cash flows Year $0.00 $1,90,000.00 $0.00 $0.00 -$17,00,000.00 $1,90,000.00 -$17,00,000.00 $1,72,710.00 0 1 0.909 1 $0.00 $0.00 $1,90,000.00 $1,90,000.00 $0.00 $0.00 $1,90,000.00 $1,90,000.00 $1,56,940.00 $1,42,690.00 2. 0.826 3 0.751 $0.00 $0.00 $0.00 $0.00 $1,90,000.00 $0.00 $1,90,000.00 $1,29,770.00 0.683 4 $1,90,000.00 $0.00 $0.00 $0.00 $1,90,000.00 $1,17,990.00 0.621 5 $1,90,000.00 $1,90,000.00 $1,90,000.00 $1,90,000.00 $1,07,160.00 $97,470.00 $2,05,480.00 -$5,69,790.00 0.564 7 0.513 $0.00 $1,90,000.00 $2,50,000.00 $4,40,000.00 8 0.467 Net Present value 2.IRR As NPV is negative it clearly indicates that the IRR is less than the 10% Proof Initial Investment -$17,00,000.00 Annual Net Income $0.00 $1,90,000.00 $1,90,000.00 $1,90,000.00 $1,90,000.00 Salvage value Net cash Flows -$17,00,000.00 $1,90,000.00 $1,90,000.00 $1,90,000.00 $1,90,000.00 Year $0.00 $0.00 $0.00 1 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 2 4 $0.00 $0.00 $1,90,000.00 $1,90,000.00 $0.00 $0.00 $1,90,000.00 $1,90,000.00 6 $0.00 $0.00 $1,90,000.00 $0.00 $2,50,000.00 $1,90,000.00 $1,90,000.00 $4,40,000.00 8 IRR 0.82% LO LO Ln LO 700

3. Net present value Annual Net Income Salvage value Net cash Flows -$17,00,000.00 Present value of $1@15% Initial Investment Present value of cash flows Year -$17,00,000.00 -$17,00,000.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $1,90,000.00 $1,90,000.00 $1,90,000.00 $0.00 $0.00 $0.00 $1,90,000.00 $1,65,300.00 0.87 1 $1,90,000.00 $1,90,000.00 $1,43,640.00 $1,25,020.00 $1,08,680.00 $94,430.00 2 0.756 3 0.658 $1,90,000.00 $1,90,000.00 $0.00 $0.00 $1,90,000.00 $1,90,000.00 0.572 4 $0.00 $0.00 $0.00 $0.00 0.497 $1,90,000.00 $1,90,000.00 $1,90,000.00 $0.00 $0.00 $2,50,000.00 $1,90,000.00 $1,90,000.00 $4,40,000.00 $82,080.00 6 0.432 $71,440.00 $1,43,880.00 $7,65,530.00 0.376 7 0.327 Net Present value 4. IRR As NPV is negative it clearly indicates that the IRR is less than the 15% Proof Salvage value Net cash Flows $0.00 Initial Investment Annual Net Income Year -$17,00,000.00 -$17,00,000.00 $0.00 $0.00 0 $1,90,000.00 $0.00 $0.00 $0.00 $1,90,000.00 $1,90,000.00 $1,90,000.00 1 $0.00 $0.00 $1,90,000.00 $1,90,000.00 2 $1,90,000.00 $1,90,000.00 $1,90,000.00 $1,90,000.00 $1,90,000.00 $0.00 $0.00 $0.00 $0.00 $1,90,000.00 $1,90,000.00 4 $0.00 $0.00 $0.00 $0.00 $0.00 $2,50,000.00 $1,90,000.00 $1,90,000.00 6 7 $4,40,000.00 0.82% IRR

E F 1 1. Net Present Value Initial Investment Present value of $1@10 % Year Annual Net Income Salvage value Net cash Flows Present value of cash flows SUM(B3:D3) -SUM(B4:D4) SUM(B5:D5) SUM(B6:D6) SUM(B7:D7) SUM(B8:D8) SUM(B9:D9) SUM(B10:D10) 0.513 SUM(B11:D11) 0.467 1 3 0 -1700000 0 0 -F3 E3 0.909 0.826 0.751 0.683 0.621 0.564 -F4 E4 1 0 190000 0 5 2 0 190000 0 -F5 E5 =F6 E6 =F7 E7 F8 E8 -F9 E9 F10 E10 6 3 0 190000 0 7 4 190000 0 8 5 0 190000 0 9 6 0 190000 0 10 7 0 190000 0 190000 11 8 0 250000 -F11 E11 12 Net Present value -SUM(G3:G11) 13 14 15 2.IRR 16 As NPV is negative it clearly indicates that the IRR is less than the 10% 17 18 Proof Initial Investment 19 Year Annual Net Income Salvage value Net cash Flows SUM(B20:D20) SUM(B21:D21) SUM(B22:D22) SUM(B23:D23) SUM(B24:D24) SUM(B25:D25) SUM(B26:D26) SUM(B27:D27) SUM(B28:D28) =IRR(E20: E28) 20 0 -1700000 0 0 190000 21 1 0 0 22 2 0 190000 0 23 3 0 190000 0 24 4 0 190000 0 25 5 0 190000 0 26 6 0 190000 0 27 7 190000 0 250000 28 8 0 190000 29 IRR 30 21

A C E F G 34 35 36 3. Net present value Initial Investment Present value of $1@15% 37 Year Annual Net Income Salvage value Net cash Flows Present value of cash flows SUM(B38:D38) 38 0 -1700000 0 0 1 SUM(B39:D39)0.87 SUM(B40:D40)0.756 SUM(B41:D41)0.658 SUM(B42:D42) 0.572 SUM(B43:D43)0.497 ESUM(B44:D44) 0.432 SUM(B45:D45) 0.376 SUM(B46:D46) 0.327 F38 E38 -F39 E39 =F40 E40 39 1 0 190000 0 40 2 0 190000 0 41 3 0 190000 0 =F41 E41 -F42 E42 42 4 0 190000 0 43 5 0 190000 0 =F43 E43 44 6 -F44 E44 -F45 E45 -F46 E46 0 190000 0 190000 45 7 0 46 8 0 190000 250000 47 Net Present value -SUM(G38:G46) 48 49 50 4. IRR 51 As NPV is negative it clearly indicates that the IRR is less than the 15% 52 53 Proof Initial Investment Salvage value 54 Year Annual Net Income Net cash Flows SUM(B55:D55) SUM(B56:D56) SUM(B57:D57) SUM(B58:D58) SUM(B59:D59) SUM(B60:D60) SUM(B61:D61) SUM(B62:D62) SUM(B63:D63) 55 0 -1700000 0 0 190000 56 1 0 0 190000 57 2 0 0 58 3 0 190000 0 59 4 0 190000 0 60 5 0 190000 0 61 6 0 190000 0 62 7 0 190000 0 63 8 0 190000 250000 IRR 64 -IRR(E55:E63)