Question

In: Accounting

Merrill Corp. has the following information available about a potential capital investment: Initial investment $ 2,200,000...

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

Initial investment $ 2,200,000

Annual net income $ 190,000

Expected life 8 years

Salvage value $ 200,000

Merrill’s cost of capital 8 %

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 8 percent.

3. Calculate the net present value using a 12 percent discount rate.

4. Without making any calculations, determine whether the internal rate of return (IRR) is more or less than 12 percent.

Solutions

Expert Solution

Req. 1)
Net Present Value = Present value of inflow - Present value of outflow
= [$ 440000 x PVAF(8%, 8 years) + $ 200000 x PVF(8%, 8th year)] - $ 2200000
= [($ 440000 x 5.746639) + ($ 200000 x 0.540269)] - $ 2200000
= $      4,36,575
Req. 2) More than 8%
Req. 3)
Net Present Value = Present value of inflow - Present value of outflow
= [$ 440000 x PVAF(12%%, 8 years) + $ 200000 x PVF(12%, 8th year)] - $ 2200000
= [($ 440000 x 4.96764) + ($ 200000 x 0.403883)] - $ 2200000
= $          66,538
Req. 4) More than 12%

Workings:

Computation of annual cash inflow
Annual net income $ 1,90,000.00
Add: Depreciation $ 2,50,000.00 [($ 2200000 - $ 200000) / 8 years]
$ 4,40,000.00

Is this correct?


Related Solutions

Merrill Corp. has the following information available about a potential capital investment:    Initial investment $ 1,800,000...
Merrill Corp. has the following information available about a potential capital investment:    Initial investment $ 1,800,000 Annual net income $ 200,000 Expected life 8 years Salvage value $ 240,000 Merrill’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...
Merrill Corp. has the following information available about a potential capital investment:    Initial investment $ 900,000...
Merrill Corp. has the following information available about a potential capital investment:    Initial investment $ 900,000 Annual net income $ 90,000 Expected life 8 years Salvage value $ 100,000 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....
Merrill Corp. has the following information available about a potential capital investment:    Initial investment $ 1,100,000...
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....
Merrill Corp. has the following information available about a potential capital investment:    Initial investment $ 800,000...
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....
Merrill Corp. has the following information available about a potential capital investment:    Initial investment $ 1,200,000...
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. 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 13 percent...
Merrill Corp. has the following information available about a potential capital investment:    Initial investment $ 700,000...
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....
Merrill Corp. has the following information available about a potential capital investment:    Initial investment $ 2,400,000...
Merrill Corp. has the following information available about a potential capital investment:    Initial investment $ 2,400,000 Annual net income $ 170,000 Expected life 8 years Salvage value $ 180,000 Merrill’s cost of capital 8 % 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....
Merrill Corp. has the following information available about a potential capital investment:    Initial investment $ 2,600,000...
Merrill Corp. has the following information available about a potential capital investment:    Initial investment $ 2,600,000 Annual net income $ 150,000 Expected life 8 years Salvage value $ 160,000 Merrill’s cost of capital 6 % 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....
Merrill Corp. has the following information available about a potential capital investment:    Initial Investment 1,700,000 Annual...
Merrill Corp. has the following information available about a potential capital investment:    Initial Investment 1,700,000 Annual Net income 190,000 Expected Life 8 years Salvage Value 250,000 Merills 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...
Merrill Corp has the following information about a potential capital investment: Initial investment $1,300,000 Annual net...
Merrill Corp has the following information about a potential capital investment: Initial investment $1,300,000 Annual net income $130,000 Expected life 8 years Salvage value $140,000 Merrill’s cost of capital 10% Assume straight line depreciation method is used. Required: 1. Calculate the projects net present value. (Future value of $1, present value of $1, future value annuity of $1, present value annuity of $1) Net present value = ? 2. Calculate the net present value using a 13% discount rate.(Future value...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT