Iggy Company is considering three capital expenditure projects. Relevant data fo
ID: 2487935 • 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.
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(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.)
(b)
If Iggy Company’s required rate of return is 11%, which projects are acceptable?
Income Life of
Project 22A $244,100 $17,140 6 years 23A 273,500 20,740 9 years 24A 280,600 15,700 7 years
Explanation / Answer
Depreciation: Cost of Asset-Salvage Value/ Life of Asset
22A:
=244,100-0/6=$40,683
23A:
=273,500-0/9=$30,389
24A:
=280,600-0/7=$40,086
Cash flow= Annual income+ Deprecation
22A:
=17,140 +40,683= $57,823
23A:
=20,740 +30,389=$ 51,129
24A:
=15,700 +40,086=$ 55,786
CashFlow
Year
22A
23A
24A
0
(244,100)
(273,500)
(280,600)
1
57,823
51,129
55,786
2
57,823
51,129
55,786
3
57,823
51,129
55,786
4
57,823
51,129
55,786
5
57,823
51,129
55,786
6
57,823
51,129
55,786
7
51,129
55,786
8
51,129
9
51,129
IRR
11.07%
11.90%
9.02%
As IRR for 22A and 23 A higher than 11% we can accept 22A and 23A
CashFlow
Year
22A
23A
24A
0
(244,100)
(273,500)
(280,600)
1
57,823
51,129
55,786
2
57,823
51,129
55,786
3
57,823
51,129
55,786
4
57,823
51,129
55,786
5
57,823
51,129
55,786
6
57,823
51,129
55,786
7
51,129
55,786
8
51,129
9
51,129
IRR
11.07%
11.90%
9.02%