Question

Iggy Company is considering three capital expenditure projects. Relevant data for the projects are as follows. Project Investment Annual Income Life of Project 22A $244,600 $16,950 6 years 23A 272,100 20,600 9 years 24A 280,600 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. (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.) Project Internal Rate of Return 22A Entry field with incorrect answer % 23A Entry field with incorrect answer % 24A Entry field with incorrect answer % (b) If Iggy Company’s required rate of return is 11%, which projects are acceptable? The following project(s) are acceptable Entry field with incorrect answer

Answer 1

Project 22A:

Annual net cash flows = 16950+(244600/6)= $57717

PV factor for Internal Rate of Return = 244600/57717= 4.23792

The PV factor 4.23792 for 6 years is closest to 11%

Internal rate of return = 11%

Project 23A:

Annual net cash flows = 20600+(272100/9)= $50833

PV factor for Internal Rate of Return = 272100/50833=5.35282

The PV factor 5.35282 for 9 years is closest to 12%

Internal rate of return = 12%

Project 24A:

Annual net cash flows = 15700+(280600/7)= $55786

PV factor for Internal Rate of Return = 280600/55786=5.02994

The PV factor 5.02994 for 7 years is closest to 9%

Internal rate of return = 9%

Project 22A and And Project 23 A are acceptable

Project with Internal Rate of Return greater than or equal to 11% should be selected