Iggy Company is considering three capital expenditure projects. Relevant data fo

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. 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.) If Iggy Company's required rate of return is 11%, which projects are acceptable? The following project(s) are acceptable

Explanation / Answer

a.

To calculate the Cash flow of projects we will add back the depreciation to annual income. So the cash flow are:

23A=244900/6=40816.67+17000=57816.67

24A=273300/9=30366.67+20650=51016.67

25A=284900/7=40700+15700=56400

Now to calculate IRR we use the following formula:

NPV= {Period Cash Flow / (1+R)^T} - Initial Investment

Put NPV=0

Now by trial and error we found the value of R . following IRR of three project by applying this formula

IRR:

23A=10.96%

24A=11.86%

25A=8.89%

b. If required rate of return us 11%then accept the project 24A.

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