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		$240,600		$17,220		6 years
23A		271,400		21,000		9 years
24A		284,100		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.

Click here to view the factor table.

(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

Answer 1

Calculation of NPV
Project 22A
IRR is the discount rate on which NPV is zero. To calculate this, we have to took two Random Discount Rate:
Period	Cash Outflow	Cash Inflow (Income+Depreciation)	P.V.F @ 11%	N.P.V @ 11%	P.V.F @ 12%	N.P.V @ 12%
0	-240600		1.00000	-2,40,600	1.00000	-2,40,600
1		57,320	0.90090	51,640	0.89286	51,179
2		57,320	0.81162	46,522	0.79719	45,695
3		57,320	0.73119	41,912	0.71178	40,799
4		57,320	0.65873	37,758	0.63552	36,428
5		57,320	0.59345	34,017	0.56743	32,525
6		57,320	0.53464	30,646	0.50663	29,040
			Total	1,894		-4,934
IRR= Lower Discount Rate + [ Lower Rate NPV / ( Lower Rate NPV - Higher Rate NPV )]*(Higher Discount Rate-Lower Discount Rate)
So By putting figure into this formula IRR is	11.27%
Project 23A
Period	Cash Outflow	Cash Inflow (Income+Depreciation)	P.V.F @ 11%	N.P.V @ 11%	P.V.F @ 13%	N.P.V @ 13%
0	-271400		1.00000	-2,71,400	1.00000	-2,71,400
1		51,156	0.90090	46,086	0.88496	45,271
2		51,156	0.81162	41,519	0.78315	40,062
3		51,156	0.73119	37,404	0.69305	35,453
4		51,156	0.65873	33,698	0.61332	31,375
5		51,156	0.59345	30,358	0.54276	27,765
6		51,156	0.53464	27,350	0.48032	24,571
7		51,156	0.48166	24,640	0.42506	21,744
8		51,156	0.43393	22,198	0.37616	19,243
9		51,156	0.39092	19,998	0.33288	17,029
			Total	11,850	Total	-8,887
IRR= Lower Discount Rate + [ Lower Rate NPV / ( Lower Rate NPV - Higher Rate NPV )]*(Higher Discount Rate-Lower Discount Rate)
So By putting figure into this formula IRR is	12.11%
Project 24A
Period	Cash Outflow	Cash Inflow (Income+Depreciation)	P.V.F @ 11%	N.P.V @ 11%	P.V.F @ 8%	N.P.V @ 8%
0	-284100		1.00000	-2,84,100	1.00000	-2,84,100
1		56,286	0.90090	50,708	0.92593	52,117
2		56,286	0.81162	45,683	0.85734	48,256
3		56,286	0.73119	41,156	0.79383	44,681
4		56,286	0.65873	37,077	0.73503	41,372
5		56,286	0.59345	33,403	0.68058	38,307
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