Question

Exercise 12-7 (Video) Iggy Company is considering three capital expenditure projects, Relevant data for the projects are as follows. Project Uitle of Income Project 16.700 years 2070 years 15700 7 years 8240 400 273 200 281 300 21 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. 13%. For calculation purposes, use 5 decimal places as displayed in the factor table provided.) temal Rate of If Iggy Company's required rate of return is 11%, which projects are acceptable? The following proj e ctable Question Anempts: Unlimited SAVE LATER BURMIT ANSWER

Answer 1

a
Project	Internal rate of return
22A	11%
23A	12%
24A	9%
b
Project 22A and 23A are acceptable
Workings:
Project 22 A
Investment cost	240400
Divide by annual cash flows	56767	=16700+(240400/6)
PV factor for internal rate of return	4.23488
The PV Factor 4.23488 for 6 years is closest to 11%
Internal rate of return = 11%
Project 23 A
Investment cost	273200
Divide by annual cash flows	51096	=20740+(273200/9)
PV factor for internal rate of return	5.34684
The PV Factor 5.34684 for 9 years is closest to 12%
Internal rate of return = 12%
Project 24 A
Investment cost	281300
Divide by annual cash flows	55886	=15700+(281300/7)
PV factor for internal rate of return	5.03349
The PV Factor 5.03349 for 7 years is closest to 9%
Internal rate of return = 9%