Question

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

Initial investment	$	700,000
Annual net income	$	70,000
Expected life		8	years
Salvage value	$	80,000
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.)

         

1a. Without making any calculations, determine whether the internal rate of return (IRR) is more or less than 7 percent.

    

	Less than 7 Percent
	Greater than 7 Percent

   

1b. 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.)

       

1c. Without making any calculations, determine whether the internal rate of return (IRR) is more or less than 14 percent.

    

	More than 14 percent
	Less than 14 percent
	Equal to 14 percent

Answer 1

Answer 1
Calculation of the project’s net present value.
Year	0	1	2	3	4	5	6	7	8	NPV
Initial Investment	-$700,000.00
Annual net income		$70,000.00	$70,000.00	$70,000.00	$70,000.00	$70,000.00	$70,000.00	$70,000.00	$70,000.00
Depreciation		$77,500.00	$77,500.00	$77,500.00	$77,500.00	$77,500.00	$77,500.00	$77,500.00	$77,500.00
Salvage value									$80,000.00
Net Cash flow	-$700,000.00	$147,500.00	$147,500.00	$147,500.00	$147,500.00	$147,500.00	$147,500.00	$147,500.00	$227,500.00
x Discount factor @ 7%	1	0.93458	0.87344	0.81630	0.76290	0.71299	0.66634	0.62275	0.58201
Present Values	-$700,000.00	$137,850.47	$128,832.21	$120,403.94	$112,527.04	$105,165.46	$98,285.48	$91,855.59	$132,407.07	$227,327.258
Net present value =	$227,327.258
Depreciation per year using straight line method = ($700000-$80000)/8 years = $77,500
Answer 2
As the NPV of the project is positive at 7% discount rate , it is concluded that IRR of the project is greater than 7%.
Answer 3
Calculation of the project’s net present value.
Year	0	1	2	3	4	5	6	7	8	NPV
Initial Investment	-$700,000.00
Annual net income		$70,000.00	$70,000.00	$70,000.00	$70,000.00	$70,000.00	$70,000.00	$70,000.00	$70,000.00
Depreciation		$77,500.00	$77,500.00	$77,500.00	$77,500.00	$77,500.00	$77,500.00	$77,500.00	$77,500.00
Salvage value									$80,000.00
Net Cash flow	-$700,000.00	$147,500.00	$147,500.00	$147,500.00	$147,500.00	$147,500.00	$147,500.00	$147,500.00	$227,500.00
x Discount factor @ 14%	1	0.87719	0.76947	0.67497	0.59208	0.51937	0.45559	0.39964	0.35056
Present Values	-$700,000.00	$129,385.96	$113,496.46	$99,558.30	$87,331.84	$76,606.88	$67,199.02	$58,946.51	$79,752.18	$12,277
Net present value =	$12,277
Answer 4
As the NPV of the project is positive at 14% discount rate , it is concluded that IRR of the project is greater than 14%