Iggy Company is considering three capital expenditure projects. Relevant data fo
ID: 2476926 • Letter: I
Question
Iggy Company is considering three capital expenditure projects. Relevant data for the projects are as follows.
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.
Click here to view PV of Annuity table.
(a)
Determine the internal rate of return for each project. (Round answers 0 decimal places, e.g. 10. For calculation purposes, use 5 decimal places as displayed in the factor table provided.)
Income Life of
Project 22A $240,900 $17,400 6 years 23A 274,900 20,950 9 years 24A 283,900 15,700 7 years
Explanation / Answer
Since there is a section re: depreciation you might assume that depreciation has not been added back to the "annual income" figures given in the first section. So...
22A: add back 240,900 / 6 = 40,150...IRR= 11.37%, NPV = (240,900) + 57,550/1.11 + 57,550/1.11^2 +...+53,300/1.11^6 = ($2565) <positive NPV, accept project
23A: add back 274900 / 9 = 30,544...IRR= 12.05%, NPV = (274,900) + 51,494/1.11 +...+51,494/1.11^9 = $10226 <positive NPV, accept project
24A: add back 283,900/ 7 = 40557...IRR=10.51%, NPV = (283,900) + 56,257/1.11+..+56,257/1.11^7 = ($18,806) <negative NPV, reject project
Note that it wouldn't actually be necessary to calculate the NPVs to decide to accept/reject project b/c these are even cash flow amounts over the project lives, so if the IRR is greater than the required rate of return, the project will be accepted, if less, rejected.