Question

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

Initial investment $ 2,000,000
Annual net income $ 210,000
Expected life 8 years
Salvage value $ 220,000
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.

Greater than 10 Percent

Less than 10 Percent

3. Calculate the net present value using a 15 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 15 percent.

More than 15 percent
Less than 15 percent
Equal to 15 percent