Question

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

Project		Investment		Annual Income		Life of Project
22A		$243,300		$16,860		6 years
23A		274,200		20,730		9 years
24A		280,500		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. Marigold 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 Marigold Company’s required rate of return is 11%, which projects are acceptable?

The following project(s) are acceptable 24A22A, 23A and 24A23A and 24A22A and 23A22A23A22A and 24A

Answer 1

	22A	23A	24A
Investment	$       2,43,300	$    2,74,200	$                 2,80,500
Annual income	$          16,860	$       20,730	$                    15,700
Add: Depreciation	$          40,550	$       30,467	$                    40,071
Annual CFAT	$          57,410	$       51,197	$                    55,771
a) IRR
To calculate IRR excel formula has been used "=irr(values,)
	22A	23A	24A
IRR	10.94%	11.86%	9.02%
b) required rate of retun = 11%
As reqd rate is 11%, projects having IRR above 11% can be selected
Projects that can be selected are
23A

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