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Homework answers / question archive / Iggy Company is considering three capital expenditure projects
Iggy Company is considering three capital expenditure projects. Relevant data for the projects are as follows. Annual Life of
Project Investment Income Project
22A $240,400 $16,700 6 years 23A 273,200 20,740 9 years 24A 281,300 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. Click here to view PV 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
a) Computation of Internal Rate of Return for Each Project:
Project 22A:
Investment = $240,400
Life of Project = 6 years
Annual Depreciation = $240,400 / 6 = $40,066.67
Annual Net Cash Flow = Annual Income + Annual Depreciation
= $16,700 + $40,066.67
Annual Net Cash Flow = $56,766.67
IRR Factor = Investment / Annual Net Cash Flow
IRR Factor = $240,400 / $56,766.67
IRR Factor = 4.23488
Using Table 4, IRR is 11%
Project 23A:
Investment = $273,200
Life of Project = 9 years
Annual Depreciation = $273,200 / 9 = $30,355.56
Annual Net Cash Flow = Annual Income + Annual Depreciation
= $20,740 + $30,355.56
Annual Net Cash Flow = $51,095.56
IRR Factor = Investment / Annual Net Cash Flow
= $273,200 / $51,095.56
IRR Factor = 5.34684
Using Table 4, IRR is 12%
Project 24A:
Investment = $281,300
Life of Project = 7 years
Annual Depreciation = $281,300 / 7 = $40,185.71
Annual Net Cash Flow = Annual Income + Annual Depreciation
= $15,700 + $40,185.71
Annual Net Cash Flow = $55,885.71
IRR Factor = Investment / Annual Net Cash Flow
= $281,300 / $55,885.71
IRR Factor = 5.03349
Using Table 4, IRR is 9%
b)
Iggy Company's required rate of return is 11%.
So, Project 22A and Project 23A are acceptable.
