Iggy Company is considering three capital expenditure projects. Relevant data fo
ID: 2484236 • Letter: I
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 $242,400 $16,890 6 years 23A 272,600 20,610 9 years 24A 284,500 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. 10. For calculation purposes, use 5 decimal places as displayed in the factor table provided.) Project Internal Rate of Return
22A Entry field with incorrect answer%
23A Entry field with incorrect answer%
24A Entry field with incorrect answer%
(b) If Iggy Company’s required rate of return is 11%, which projects are acceptable? The following project(s) are acceptable?
McKnight Company is considering two different, mutually exclusive capital expenditure proposals. Project A will cost $495,912, has an expected useful life of 12 years, a salvage value of zero, and is expected to increase net annual cash flows by $72,400. Project B will cost $334,604, has an expected useful life of 12 years, a salvage value of zero, and is expected to increase net annual cash flows by $50,000. A discount rate of 8% is appropriate for both projects. Click here to view PV table.
Compute the net present value and profitability index of each project. (If the net present value is negative, use either a negative sign preceding the number eg -45 or parentheses eg (45). Round present value answers to 0 decimal places, e.g. 125 and profitability index answers to 2 decimal places, e.g. 15.25. For calculation purposes, use 5 decimal places as displayed in the factor table provided.)
Which project should be accepted based on Net Present Value?
Which project should be accepted based on profitability index?
Explanation / Answer
(a) IRR is that rate at which NPV is zero. Trying for various rates in the table below,we get :
IRR of Project 22A = 11%
IRR of Project 23A = 11.86%
IRR of Project 24A = 8.90%
(b)
Project 23A has a positive NPV hence it is acceptable.
Year Project 22A Project 23A Project 24A PV factor PV 23A PV 23A PV 24A 0 -242400 -272600 -284500 1 -242400 -272600 -284500 1 57290 50899 56343 0.9009 51612.61 45854.95 50759.46 2 57290 50899 56343 0.8116 46497.85 41310.77 45729.24 3 57290 50899 56343 0.7312 41889.95 37216.91 41197.52 4 57290 50899 56343 0.6587 37738.70 33528.75 37114.88 5 57290 50899 56343 0.5935 33998.83 30206.08 33436.83 6 57290 50899 56343 0.5346 30629.57 27212.68 30123.27 7 0 50899 56343 0.4817 0.00 24515.93 27138.08 8 0 50899 0 0.4339 0.00 22086.42 0.00 9 0 50899 0 0.3909 0.00 19897.68 0.00 NPV -32.49 9230.18 -19000.73