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.

(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?

Project Investment Annual
Income Life of
Project 22A $241,900 $17,500 6 years 23A 270,900 20,780 9 years 24A 282,000 15,700 7 years

Explanation / Answer

Project 22 A: Annual cash flows=17500+(241900/6)= $57817 PV factor for internal rate of return =241900/57817= 4.18389 Internal rate of return = 11% Project 23 A: Annual cash flows=20780+(270900/9)= $50880 PV factor for internal rate of return = 270900/50880= 5.32429 Internal rate of return = 12% Project 24 A: Annual cash flows=15700+(282000/7)= $55986 PV factor for internal rate of return = 282000/55986= 5.03697 Internal rate of return = 9% Project 22A and 23A are acceptable

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