House Company is c onsidering three capital expenditure projects. Relevant data

Question

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

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. House Company uses the straight-line method of depreciation.

(a) Determine the internal rate of return for each project. (Round Internal Rate of Return Factor to 3 decimal places, e.g. 1.250 and Internal Rate of Return to 0 decimal places, e.g. 23%.)

Project
Investment Annual
Income Life of
Project 22A $195,000 $9,839 5 years 23A 285,000 21,941 10 years 24A 242,900 15,193 7 years

Explanation / Answer

Annual depreciation for 22A= $240,000/6 =$40000
Annual depreciation for 23A =270,000/9=$30000
Annual depreciation for 24A =288,000/8 = $36000

IRR for 22A
NPV =0
-$240,000 +$13,300/(1+r) +$13,300/(1+r)^2 ....$13,300/(1+r)^6 =0
r =-24.6%

IRR for 23A
NPV =0
-270,000 +$21,000/(1+r) +$21,000/(1+r)^2 ....$21,000/(1+r)^9 =0
r =-6.6%


IRR for 24A
NPV =0
-288,000 +$20,000/(1+r) +$20,000/(1+r)^2 ....$20,000/(1+r)^8 =0
r =-11.49%

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