Question

Iggy Company is considering three capital expenditure projects. Relevant data for the projects are as follows:

Project Investment Annual Income Life of Project
22A $240,900 $17,400 6 years
23A 274,900 20,950 9 years
24A 283,900 15,700 7 years
Annual income is constant over the life of the project.

Each project is expected to have zero salvage value at the end of the project.

Iggy Company uses the straight-line method of depreciation.

Required:

(a) Determine the internal rate of return for each project.

(Round intermediate calculations to 5 decimal places and final answers to 0 decimal places)

Project Internal Rate of Return
22A %
23A %
24A %
(b) If Iggy Company's required rate of return is 11%, which projects are acceptable?

Answer 1

Step-by-step explanation:

Base on the scenario been described in the question, we can use the following method to solve the given problem

Project: 22A

Year

Annual Income

Depreciation

Cash flow

Discount factor at 10%

Present Value of a cash flow

Discount factor 20%

Present Value of a cash flow

0

$ (240,900.00)

$ (240,900.00)

1

$ (240,900.00)

1

$ (240,900.00)

1

$ 17,400.00

$ 40,150.00

$ 57,550.00

0.90909

$ 52,318.18

0.83333

$ 47,958.33

2

$ 17,400.00

$ 40,150.00

$ 57,550.00

0.82645

$ 47,561.98

0.69444

$ 39,965.28

3

$ 17,400.00

$ 40,150.00

$ 57,550.00

0.75131

$ 43,238.17

0.57870

$ 33,304.40

4

$ 17,400.00

$ 40,150.00

$ 57,550.00

0.68301

$ 39,307.42

0.48225

$ 27,753.67

5

$ 17,400.00

$ 40,150.00

$ 57,550.00

0.62092

$ 35,734.02

0.40188

$ 23,128.05

6

$ 17,400.00

$ 40,150.00

$ 57,550.00

0.56447

$ 32,485.47

0.33490

$ 19,273.38

$ 9,745.25

$ (49,516.89)

IRR =

Lower rate + × (NPV at lower rate Difference in rate/(NPV at lesser rate-NPV at higher rate))

10%+(9,745.25*1/(9745.25-(-49516.89)))

11.64%