Question

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

Initial investment	$	800,000
Annual net income	$	80,000
Expected life		8	years
Salvage value	$	90,000
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.

3. Calculate the net present value using a 14 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 14 percent.

3. Calculate the net present value using a 14 percent discount rate.

4. Without making any calculations, determine whether the internal rate of return (IRR) is more or less than 14 percent.

Answer 1

Solution 1:

Annual depreciation = (Cost - Salvage value) / Useful life = ($800,000 - $90,000) / 8 = $88,750

Annual cash inflows = Net income + Depreciation = $80,000 + $88,750 = $168,750

Computation of NPV - Merrill Corp.
Particulars	Period	Amount	PV factor at 7%	Present Value
Cash outflows:
Initial investment	0	$800,000.00	1	$800,000
Present Value of Cash outflows (A)				$800,000
Cash Inflows
Annual cash inflows	1-8	$168,750.00	5.97130	$1,007,657
Salvage value	8	$90,000.00	0.58201	$52,381
Present Value of Cash Inflows (B)				$1,060,038
Net Present Value (NPV) (B-A)				$260,038

Solution 2:

As NPV is positive, therefore IRR is greater than 7%.

Solution 3:
Computation of NPV - Merrill Corp.
Particulars	Period	Amount	PV factor at 14%	Present Value
Cash outflows:
Initial investment	0	$800,000.00	1	$800,000
Present Value of Cash outflows (A)				$800,000
Cash Inflows
Annual cash inflows	1-8	$168,750.00	4.63886	$782,808
Salvage value	8	$90,000.00	0.35056	$31,550
Present Value of Cash Inflows (B)				$814,358
Net Present Value (NPV) (B-A)				$14,358

Solution 4:

As NPV is positive, therefore IRR is greater than 14%.