100 points Merrill Corp. has the following information available about a potenti
ID: 2524734 • Letter: 1
Question
100 points Merrill Corp. has the following information available about a potential capital investment: Initial investment Annual net income Expected life Salvage value Merrill's cost of capital 2,600,000 S 150,000 8 years S 160,000 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. Round the final answer to nearest whole dollar.) Present Value 2. Without making any calculations, determine whether the internal rate of return (IRR) is more or less than 6 peroent Less than 6 Percent Greater than 6 Percent 3. Calculate the net present value using a 8 percent discount rate u ure li intermediate calculations. Round the final answer to nearest whole dollar.) 1. Pre n we 1. E um a u nu ?? 1. Pre ont li nnu yo 1) Use appropriate factor(s) from the tables provided. Do not round Present Value 4. Wthout making any calculations, determine whether the internal rate of return (IRR) is more or less than 8 percent O More than 8 percent Less than 8 percent Equal to 8 peroentExplanation / Answer
Initial investment = 2,600,000
Expected life = 8 years
Salvage value = 160,000
Depreciation under Straight line method = (cost - salvage value) / expected life
= (2,600,000 - 160,000) / 8
= 305,000
Annual net income = 150,000
Annual cash flows = Annual net income + Annual depreciation
= 150,000 + 305,000
= 455,000
1.
PVAF of 6% for 8 years = 6.210
Present value of cash inflows = 455,000 * 6.210 = 2,825,550
Present value of cash outflows = 2,600,000
Net present value = Present value of cash inflows - Present value of cash outflows
= 2,825,550 - 2,600,000
= 225,550
2.
At IRR, NPV = 0
For NPV to become 0, IRR should be Greater than 6%
3.
PVAF of 8% for 8 years = 5.747
Present value of cash inflows = 455,000 * 5.747 = 2,614,885
Present value of cash outflows = 2,600,000
Net present value = Present value of cash inflows - Present value of cash outflows
= 2,614,885 - 2,600,000
= 14,885
4.
At IRR, NPV = 0
For NPV to become 0, IRR should be Greater than 8%
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