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		$243,000		$16,720		6 years
23A		270,900		20,620		9 years
24A		283,300		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.

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(a)

Determine the internal rate of return for each project. (Round answers 0 decimal places, e.g. 13%. For calculation purposes, use 5 decimal places as displayed in the factor table provided.)

Project		Internal Rate of Return
22A		%
23A		%
24A		%

(b)

If Iggy Company’s required rate of return is 11%, which projects are acceptable?

The following project(s) are acceptable 22A and 23A23A22A and 24A22A, 23A and 24A24A22A23A and 24A

Answer 1

Solution a:

Computation of Annual cash inflows for each project
Particulars	Project 22A	Project 23A	Project 24A
Annual income	$16,720	$20,620	$15,700
Add: Depreciation	$40,500	$30,100	$40,471
Annual cash inflows	$57,220	$50,720	$56,171

Computation of IRR
Period	Project 22A		Project 23A		Project 24A
	Cash Flows	IRR	Cash Flows	IRR	Cash Flows	IRR
0	-$243,000.00	11%	-$270,900.00	12%	-$283,300.00	9%
1	$57,220.00		$50,720.00		$56,171.00
2	$57,220.00		$50,720.00		$56,171.00
3	$57,220.00		$50,720.00		$56,171.00
4	$57,220.00		$50,720.00		$56,171.00
5	$57,220.00		$50,720.00		$56,171.00
6	$57,220.00		$50,720.00		$56,171.00
7			$50,720.00		$56,171.00
8			$50,720.00
9			$50,720.00

Solution b:

If Iggy Company’s required rate of return is 11%, then Project 22A and Project 23A are acceptable.