Question

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

Initial investment	$	1,200,000
Annual net income	$	120,000
Expected life		8	years
Salvage value	$	130,000
Merrill’s cost of capital		10	%

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 10 percent.

    

	Greater than 10 Percent
	Less than 10 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

Solution 1:

Annual depreciation = (Cost - Salvage value) / Useful life = ($1,200,000 - $130,000) / 8 = $133,750

Annual cash inflows = Net Income + Depreciation = $120,000 + $133,750 = $253,750

Computation of NPV - Merrill Corp.
Particulars	Period	Amount	PV factor at 10%	Present Value
Cash outflows:
Initial investment	0	$1,200,000.00	1	$1,200,000
Present Value of Cash outflows (A)				$1,200,000
Cash Inflows
Annual cash inflows	1-8	$253,750.00	5.33493	$1,353,738
Salvage value	8	$130,000.00	0.46651	$60,646
Present Value of Cash Inflows (B)				$1,414,383
Net Present Value (NPV) (B-A)				$214,383

Solution 2:

As NPV is positive, it means IRR is greater than 10%.

Solution 3:

Computation of NPV - Merrill Corp.
Particulars	Period	Amount	PV factor at 13%	Present Value
Cash outflows:
Initial investment	0	$1,200,000.00	1	$1,200,000
Present Value of Cash outflows (A)				$1,200,000
Cash Inflows
Annual cash inflows	1-8	$253,750.00	4.79877	$1,217,688
Salvage value	8	$130,000.00	0.37616	$48,901
Present Value of Cash Inflows (B)				$1,266,589
Net Present Value (NPV) (B-A)				$66,589

Solution 4:

As NPV is positive, it means IRR is greater than 13%.