Question

Merrill Corp. has the following information available about a potential capital investment Initial investment $1,eee, ee0 $ 100,000 8 years Annual net income Expected life Salvage value Merrill's cost of capital $ 110,000 7% 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 7 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 Complete this question by entering your answers in the tabs below. Req 3 and 4 Req 1 and 2 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. Show less

Answer 1

Solution 1:

Annual cash inflows = Net income + Depreciation = $100,000 + ($1,000,000 - $110,000) / 8 = $211,250

Computation of NPV - Merrill Corp.
Particulars	Period	Amount	PV factor at 7%	Present Value
Cash outflows:
Initial investment	0	$1,000,000.00	1	$1,000,000
Present Value of Cash outflows (A)				$1,000,000
Cash Inflows
Annual cash inflows	1-8	$211,250.00	5.97130	$1,261,437
Salvage value	8	$110,000.00	0.58201	$64,021
Present Value of Cash Inflows (B)				$1,325,458
Net Present Value (NPV) (B-A)				$325,458

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	$1,000,000.00	1	$1,000,000
Present Value of Cash outflows (A)				$1,000,000
Cash Inflows
Annual cash inflows	1-8	$211,250.00	4.63886	$979,960
Salvage value	8	$110,000.00	0.35056	$38,561
Present Value of Cash Inflows (B)				$1,018,521
Net Present Value (NPV) (B-A)				$18,521

Solution 4:

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