Iggy Company is considering three capital expenditure projects. Relevant data fo
ID: 2581139 • 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 $240,600 $17,220 6 years 23A 271,400 21,000 9 years 24A 284,100 15,700 7 years
Explanation / Answer
Annual cash flows = Annual Income+Depreciation expense Project 22A: Annual cash flows = 17220+(240600/6)= 57320 PV factor for internal rate of return = 240600/57320= 4.19749 Internal rate of return = 11% Project 23A: Annual cash flows = 21000+(271400/9)= 51156 PV factor for internal rate of return = 271400/51156= 5.30534 Internal rate of return = 12% Project 24A: Annual cash flows = 15700+(284100/7)= 56286 PV factor for internal rate of return = 284100/56286= 5.04744 Internal rate of return = 9% b Project 22A and Project 23A are acceptable