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.)

%

The following project(s) are acceptable

Project Investment Annual
Income Life of
Project 22A $241,400 $17,590 6 years 23A 271,100 20,620 9 years 24A 282,100 15,700 7 years

Explanation / Answer

Project 22A: Annual cash flows = 17590+(241400/6)= 57823 PV factor for Internal Rate of Return=241400/57823= 4.17479 Internal Rate of Return= 11% Project 23A: Annual cash flows = 20620+(271100/9)= 50742 PV factor for Internal Rate of Return=271100/50742= 5.34269 Internal Rate of Return= 12% Project 24A: Annual cash flows = 15700+(282100/7)= 56000 PV factor for Internal Rate of Return=282100/56000= 5.03750 Internal Rate of Return= 9% Project 22A and 23A are acceptable

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