Question

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

Initial investment	$	1,500,000
Annual net income	$	150,000
Expected life		8	years
Salvage value	$	160,000
Merrill’s cost of capital		10	%

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.)

         

Net Present Value

2. Without making any calculations, determine whether the internal rate of return (IRR) is more or less than 10 percent.

    

	Less than 10 Percent OR
	Greater than 10 Percent

   

3. Calculate the net present value using a 13 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.)

       

Net Present Value

4. Without making any calculations, determine whether the internal rate of return (IRR) is more or less than 13 percent.

    

	More than 13 percent OR
	Less than 13 percent OR
	Equal to 13 percent

Answer 1

(1). Net present value pf the project = $268480

Explanation;

First of all let’s calculate annual cash flows;

Annual cash flow = Annual net income + Depreciation

Annual net income is given = $150000

Depreciation ($1500000 – $160000) / 8 = $167500

Thus annual cash flow ($150000 + $167500) = $317500

Now let’s calculate project’s net present value;

Year	Annual cash flows	Discounting factor @ 10%	Present value
0	($1500000)	1	($1500000)
1	$317500	(1 + 0.10)1	$288636.36
2	$317500	(1 + 0.10)2	$262396.69
3	$317500	(1 + 0.10)3	$238542.45
4	$317500	(1 + 0.10)4	$216856.77
5	$317500	(1 + 0.10)5	$197142.52
6	$317500	(1 + 0.10)6	$179220.47
7	$317500	(1 + 0.10)7	$162927.7
8	$477500	(1 + 0.10)8	$222757.27
Net present value of project			$268480.23

(2). IRR is greater than 10%

Explanation;

As we have seen that at 10% net present is more than $0 hence IRR must be greater than 10% because as per rule of IRR NPV should be zero but at 10% NPV is more than zero hence IRR will be greater than 10%.

(3). Net present value pf the project = $83795

Explanation;

First of all let’s calculate annual cash flows;

Annual cash flow = Annual net income + Depreciation

Annual net income is given = $150000

Depreciation ($1500000 – $160000) / 8 = $167500

Thus annual cash flow ($150000 + $167500) = $317500

Now let’s calculate project’s net present value;

Year	Annual cash flows	Discounting factor @ 13%	Present value
0	($1500000)	1	($1500000)
1	$317500	(1 + 0.13)1	$280973.45
2	$317500	(1 + 0.13)2	$248649.07
3	$317500	(1 + 0.13)3	$220043.43
4	$317500	(1 + 0.13)4	$194728.7
5	$317500	(1 + 0.13)5	$172326.28
6	$317500	(1 + 0.13)6	$152501.13
7	$317500	(1 + 0.13)7	$134956.75
8	$477500	(1 + 0.13)8	$179616.33
Net present value of project			$83795.14

(4). IRR is more than 13%

Explanation;

As we have seen that at 13% net present is more than $0 hence IRR must be greater than 13% because as per rule of IRR NPV should be zero but at 13% NPV is more than zero hence IRR will be greater than 13%.