Question

Iggy Company is considering three capital expenditure projects. Relevant data for the projects are as follows.

Annual Life of Project Investment Income Project 22A $242,300 $17450 6 years 23A 274,200 20,920 9 years 24A 281,700 15,700 7 years 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. Click here to view PV table. Determine the internal rate of return foreach project. (Round answers O decimal places, eg 10. For calculation purposes, use 5 decimal places as displayed in the factor table provided.) Internal Rate of Return Project 22A 23A 24A If Iggy Company's required rate of return is 11%, which projects are acceptable? The following project(s) are acceptable

Answer 1

Internal Rate of Return for each Project

Projects	Internal Rate of Return
Project 22A	11%
Project 23A	12%
Project 24A	9%

Workings

Depreciation Project 22A = $40,383 [$242,300 / 6 Years]

Depreciation Project 23A = $30,467 [$274,200 / 9 Years]

Depreciation Project 24A = $40,243 [$281,700 / 7 Years]

Annual cash flow = Net Income + Depreciation

Project 22A = $57,833 [$17,450 + $40,383]

Project 23A = $51,387 [$20,920 + $30,467]

Project 24A = $55,943 [$15,700 + $40,243]

Internal Rate of Return Determination

IRR for Project 22A

Internal Rate of Return Factor = Net Initial Investment / Annual Cash Flow

= $242,300 / $57,833

= 4.18963

From the Present Value Annuity Factor Table, the discount rate (IRR) corresponding to the factor of 4.18963 for 6 Years is 11%

IRR for Project 23A

Internal Rate of Return Factor = Net Initial Investment / Annual Cash Flow

= $274,200 / $51,387

= 5.33601

From the Present Value Annuity Factor Table, the discount rate (IRR) corresponding to the factor of 5.33601 for 9 Years is 12%

IRR for Project 24A

Internal Rate of Return Factor = Net Initial Investment / Annual Cash Flow

= $281,700 / $55,943

= 5.03550

From the Present Value Annuity Factor Table, the discount rate (IRR) corresponding to the factor of 5.03550 for 7 Years is 9%

Acceptable Projects

If Iggy Company’s Required rate of return is 11%, then Project 22A and Project 23A Should be selected, Since the IRR of Project 22A and Project 23A Exceeds the required rate of return

Therefore, the Acceptable Projects are Project 22A and Project 23A