#E11-4

MIC Initial investment Annual net income Expected life Salvage value Merrill's cost of capital $1.600.000 $ 250.000 8 years $ 350,000 10% calculations, determine whether the internal rate of return (IRR) is more Required: 1. Calculate the project's net present value. 2. Without making any calculations, determine whether or less than 10 percent. 3. Calculate the net present value using a 20 percent discount ra 4. Estimate the project's IRR. LO 11 E11- Calculating Accounting Rate of Return, Payback Pe Accounting Rate of Return, Payback Period, Net Present Value, Estimating Internal Rate of Return Travel (LLT) is considering the purchase of two Hummer limousines. Various information about the proposed investment follows: Initial investment (2 limos) Useful life Salvage value Annual net income generated LLT's cost of capital $600,000 8 years $100,000 $ 48,000 12% Required: Help LLT evaluate this project by calculating each of the following: 1. Accounting rate of return. 2. Payback period. 3. Net present value. 4. Based on your calculation of net present value, what would you estimate the project's inter- nal rate of return to be? E11-5 Analyzing Relationship between Net Present Value and Internal Rate of Return Consider the relationship between a project's net present value (NPV), its internal rate of return (IRR), and a company's cost of capital. For each scenario that follows, indicate the relative value of the unknown. If cost of capital is unknown, indicate whether it would be higher or lower than the stated IRR. If NPV is unknown, indicate whether it would be higher or lower than zero. Project 1 is shown as an example. Net Present Value Cost of Capital 13% Internal Rate of Return