Question

Grouper Company is considering three capital expenditure projects. Relevant data for the projects are as follows. Project Investment Annual Income Life of Project 22A $237,600 286,200 $16,563 6 years 21,914 9 years 23A 24A 263,200 14,695 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. Grouper 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 Odecimal places, eg. 10. For calculation purposes, use 5 decimal places as displayed in the factor table provided.) Project Internal Rate of Return 22A 23A 24A (6) If Grouper Company's required rate of return is 11%, which projects are acceptable? The following project(s) are acceptable

Answer 1

a.
Project	IRR
22A	11%
23A	12%
24A	9%
b.
Project 22A and Project 23A are acceptable projects if required rate of return is 11%
Workings:
Computation of IRR of Project 22A:
Annual cash Inflow	=	Depreciation + Annual Income
	=	($237600/6 years) + $16563
	=	$         56,163
	Year	Value Flows
	0	$   -2,37,600
	1	$         56,163
	2	$         56,163
	3	$         56,163
	4	$         56,163
	5	$         56,163
	6	$         56,163
IRR	=	11%
Computation of IRR of Project 23A:
Annual cash Inflow	=	Depreciation + Annual Income
	=	($286200/9 years) + $21914
	=	$         53,714
	Year	Value Flows
	0	$   -2,86,200
	1	$         53,714
	2	$         53,714
	3	$         53,714
	4	$         53,714
	5	$         53,714
	6	$         53,714
	7	$         53,714
	8	$         53,714
	9	$         53,714
IRR	=	12%
Computation of IRR of Project 24A:
Annual cash Inflow	=	Depreciation + Annual Income
	=	($263200/7 years) + $14695
	=	$         52,295
	Year	Value Flows
	0	$   -2,63,200
	1	$         52,295
	2	$         52,295
	3	$         52,295
	4	$         52,295
	5	$         52,295
	6	$         52,295
	7	$         52,295
IRR	=	9%