Merrill Corp. has the following information available about a potential capital investment: Initial investment ..........$1,600,000 Annual net

Question:

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

Initial investment ..........$1,600,000

Annual net income .......... $ 250,000

Expected life ............ 8 years

Salvage value ............ $ 350,000

Merrill’s cost of capital ........ 10%

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 10 percent.

3. Calculate the net present value using a 20 percent discount rate.

4. Estimate the project’s IRR.

Net Present Value
What is NPV? The net present value is an important tool for capital budgeting decision to assess that an investment in a project is worthwhile or not? The net present value of a project is calculated before taking up the investment decision at... Internal Rate of Return
Internal Rate of Return of IRR is a capital budgeting tool that is used to assess the viability of an investment opportunity. IRR is the true rate of return that a project is capable of generating. It is a metric that tells you about the investment... Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important... Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...