Question

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. Round the final answer to nearest whole dollar.)

         

2. Calculate the net present value using a 10 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.)

       

Answer 1

Depreciation = ( original value- salavge value)/estimated useful life
	(2,400,000-180,000)/8
	277500
	net annual cash flow
	net income				170,000
	Add:Depreciation for the year				277500
	net annual cash flow				447,500
Required 1
year		0	1-----7	8
Initial investment		-2,400,000
annual net cash flow			447,500	447,500
salvage value				180,000
total		-2,400,000	447500	627500
discount fator (8%)		1	5.20637	0.54027
present value		-2400000	2329851	339019.4	268870
net present value		268,870
Required 2
year		0	1-----7	8
Initial investment		-2,400,000
annual net cash flow			447,500	447,500
salvage value				180,000
total		-2,400,000	447500	627500
discount fator (10%)		1	4.86842	0.46651
present value		-2400000	2178618	292735	71352.98
net present value		71,353