Question

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 of $1, present value of $1, future value annuity of $1, present value annuity of $1)

Net present value= ?

Answer 1

Solution 1:

Computation of NPV - Merrill Corp.
Particulars	Amount
Table or calculator function:	Present Value of $1
Cash Outflows (Beginning of year)	-$13,00,000
n=	0
i=	10%
Present Value	-$13,00,000
Table or calculator function:	Present Value of annuityof $1
Cash Inflow (for next 8 years)	$2,75,000
n=	8
i=	10%
Table Factor	5.33493
Present Value	$14,67,106
Table or calculator function:	Present Value of $1
Cash Inflow (for 8th year)	$1,40,000
n=	8
i=	10%
Table Factor	0.46651
Present Value	$65,311
Total Net present value	$2,32,417

Solution 2:

Computation of NPV - Merrill Corp.
Particulars	Amount
Table or calculator function:	Present Value of $1
Cash Outflows (Beginning of year)	-$13,00,000
n=	0
i=	13%
Present Value	-$13,00,000
Table or calculator function:	Present Value of annuityof $1
Cash Inflow (for next 8 years)	$2,75,000
n=	8
i=	13%
Table Factor	4.79877
Present Value	$13,19,662
Table or calculator function:	Present Value of $1
Cash Inflow (for 8th year)	$1,40,000
n=	8
i=	13%
Table Factor	0.37616
Present Value	$52,662
Total Net present value	$72,324