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		$242,200		$16,890		6 years
23A		271,500		20,710		9 years
24A		283,000		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		%
23A		%
24A		%

(b)

If Iggy Company’s required rate of return is 11%, which projects are acceptable?

The following project(s) are acceptable 23A22A and 24A24A22A, 23A and 24A22A and 23A23A and 24A22A

Answer 1

A)

Answer
Project	Internal rate of return
22A	11%
23A	12%
24A	9%
Project 22A and 23A are acceptable

Workings:
Project 22 A
Investment cost	242200
Divide by annual cash flows	57257	16890+(242200/6)
PV factor for internal rate of return	4.23008
The PV Factor 4.23008 for 6 years is closest to 11%
Internal rate of return = 11%

Project 23 A
Investment cost	271500
Divide by annual cash flows	50877	20710+(271500/9)
PV factor for internal rate of return	5.33643
The PV Factor 5.33643 for 9 years is closest to 12%
Internal rate of return = 12%

Project 24 A
Investment cost	283000
Divide by annual cash flows	56129	56128.57143
PV factor for internal rate of return	5.042
The PV Factor 5.0420 for 7 years is closest to 9%
Internal rate of return = 9%

B)	Project 22A and 23A are acceptable