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                                                           24A23A22A23A and 24A22A and 24A22A and 23A22A, 23A and 24A

Answer 1

a.
Project	IRR
22A	11%
23A	12%
24A	9%
b.
Project 22A and Project 23A are acceptable projects if required rate of return is 11%
Workings:
Computation of IRR of Project 22A:
Annual cash Inflow	=	Depreciation + Annual Income
	=	($240600/6 years) + $17220
	=	$         57,320
	Year	Value Flows
	0	$   -2,40,600
	1	$         57,320
	2	$         57,320
	3	$         57,320
	4	$         57,320
	5	$         57,320
	6	$         57,320
IRR	=	11%
Computation of IRR of Project 23A:
Annual cash Inflow	=	Depreciation + Annual Income
	=	($271400/9 years) + $21000
	=	$         51,156
	Year	Value Flows
	0	$   -2,71,400
	1	$         51,156
	2	$         51,156
	3	$         51,156
	4	$         51,156
	5	$         51,156
	6	$         51,156
	7	$         51,156
	8	$         51,156
	9	$         51,156
IRR	=	12%
Computation of IRR of Project 24A:
Annual cash Inflow	=	Depreciation + Annual Income
	=	($284100/7 years) + $15700
	=	$         56,286
	Year	Value Flows
	0	$   -2,84,100
	1	$         56,286
	2	$         56,286
	3	$         56,286
	4	$         56,286
	5	$         56,286
	6	$         56,286
	7	$         56,286
IRR	=	9%