Question

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

Initial investment	$	1,100,000
Annual net income	$	110,000
Expected life		8	years
Salvage value	$	120,000
Merrill’s cost of capital		7	%

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.)

         

2. Without making any calculations, determine whether the internal rate of return (IRR) is more or less than 7 percent.

    

	Greater than 7 Percent
	Less than 7 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.)

       

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

1		A	B	A*B
	Year	Cash Flow	PV of Discount Factor @ 7%	PV of Cash Flow
	0	-1100000	1.00	-1,100,000.00
	1	232500	0.93	217,289.72			Initial Investment	1100000
	2	232500	0.87	203,074.50			Less: Salavage Value	120000
	3	232500	0.82	189,789.26			Depreciable Value	980000
	4	232500	0.76	177,373.14			Useful Life	8
	5	232500	0.71	165,769.29			Depreciation PA	122500
	6	232500	0.67	154,924.57
	7	232500	0.62	144,789.31
	8	232500+120000	0.58	205,158.21			Net Income	110000
				358,168.00			Add: Depreciation	122500
							Cash Flow	232500
2	At IRR NPV is Zero, In the above Case NPV is Postive at 7%
	This Implies the project can provide higher returns and can be discounted at higher than 7 % rate
3
		A	B	A*B
	Year	Cash Flow	PV of Discount Factor @ 13%	PV of Cash Flow
	0	-1100000	1.00	-1,100,000.00
	1	232500	0.88	205,752.21			Initial Investment	1100000
	2	232500	0.78	182,081.60			Less: Salavage Value	120000
	3	232500	0.69	161,134.16			Depreciable Value	980000
	4	232500	0.61	142,596.60			Useful Life	8
	5	232500	0.54	126,191.69			Depreciation PA	122500
	6	232500	0.48	111,674.06
	7	232500	0.43	98,826.60
	8	232500+120000	0.38	132,596.35			Net Income	110000
				60,853.28			Add: Depreciation	122500
							Cash Flow	232500
4	At IRR NPV is Zero, In the above Case NPV is Postive at 13%
	This Implies the project can provide higher returns and can be discounted at higher than 13 % rate