Question

Salarian Company is considering two capital expenditures. Relevant data for the projects are as follows: Project A B Initial investment $215,545 $230,821 Annual income $41,400 $40,080 Life of project 7 years 9 years Salvage value $0 $0 Salarian Company uses the straight-line method to depreciate its assets.

(a) Calculate the internal rate of return for each project. (For calculation purposes, use 4 decimal places as displayed in the factor table provided, e.g. 1.2512. Round answers to 0 decimal places, e.g. 15%.) Click here to view PV table. Internal rate of return Project A % Project B %

Answer 1

Year	Cash Flow Project A	PV Factor @	PV Factor @	Present vaue Project A) at PV Factor	Present vaueProject A) at PV Factor	Cash Flow Project B	PV Factor @	PV Factor @	Present vaue at Project B PV Factor	Present vaue Project B) at PV Factor
		6%	12%	0.06	0.06		5%	12%	0.05131	0.05131
0	-215545	1	1	-215545	-215545	-230821	1	1	-230821	-230821
1	41400	0.9434	0.8929	39,057	36,964	40080	0.9512	0.8929	38,124	35,786
2	41400	0.8900	0.7972	36,846	33,004	40080	0.9048	0.7972	36,263	31,952
3	41400	0.8396	0.7118	34,760	29,468	40080	0.8606	0.7118	34,493	28,528
4	41400	0.7921	0.6355	32,793	26,310	40080	0.8186	0.6355	32,810	25,472
5	41400	0.7473	0.5674	30,936	23,491	40080	0.7787	0.5674	31,209	22,742
6	41400	0.7050	0.5066	29,185	20,975	40080	0.7407	0.5066	29,685	20,306
7	41400	0.6651	0.4523	27,533	18,727	40080	0.7045	0.4523	28,237	18,130
8						40080	0.6701	0.4039	26,858	16,188
9						40080	0.6374	0.3606	25,548	14,453
	NPV			15,566	(26,605)				52,406	(17,265)
	IRR = Lower Discount Rate + [Lower Rate NPV / (Lower Rate NPV - Higher Rate NPV)] * (Higher Discount Rate - Lower Discount Rate)
	By putting above values in the above formula we get
		Internal rate of return
	Project A	8	%
	Project B	10	%