Ueker Company is considering three capital expenditure projects. Relevant data f

Question

Ueker Company is considering three capital expenditure projects. Relevant data for the projects are as follows Annual Life of Income Project $244,390 $17,310 6 years 273,630 20,980 9 years 280,180 17,950 7 years Project Investment 22A 23A 24A 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. Ueker Company uses the straight-line method of depreciation. (Refer the below table) TABLE 4 Present Value of an Annuityv of 1 1t Payments 4% 5% 6% 1% 890 9% 10% 11% 12% 15% 95238 .94340 0.93458 .92593 91743.90909 90090 89286 86957 1.88609 1.85941 1.83339 .80802 1.78326 1.7591 1.73554 1.71252 1.69005 1.62571 2.77509 2.72325 2.6730 2.62432 2.57710 2.53130 2.48685 2.44371 2.40183 2.28323 3.62990 3.54595 3.46511 3.38721 3.31213 3.23972 3.16986 3.10245 3.03735 2.85498 4.45182 4.32948 4.21236 4.10020 3.9927 3.88965 3.79079 3.69590 3.60478 3.35216 5.24214 5.07569 4.91732 4.76654 4.62288 4.48592 4.35526 4.23054 4.11141 3.78448 6.00205 5.78637 5.58238 5.38929 5.20637 5.03295 4.86842 4.71220 4.56376 4.16042 6.73274 6.46321 6.20979 5.97130 5.74664 5.53482 5.33493 5.14612 4.96764 4.48732 7.43533 7.10782 6.80169 6.51523 6.24689 5.99525 5.75902 5.53705 5.32825 4.77158 8.11090 7.72173 7.36009 7.02358 6.71008 6.41766 6.14457 5.88923 5.65022 5.01877 8.76048 8.30641 7.88687 7.49867 7.13896 6.80519 6.49506 6.20652 5.93770 5.23371 7 94269 7 53608 716073 6 81369 6 49736 6 19437 5 42062 96154 4 7 9 10 9 38507 8 8632 8 38384

Explanation / Answer

Project 22A

depreciation = 244390/6 = $40732 per year

Net cash flow = $17310 + $40732 = $58042

For 5%,

NPV = - 244390 + 58042 * PVIFA (5%, 6) = $50230

For 15%

NPV = - 244390 + 58042 * PVIFA (15%, 6) = -$24702

By interpolation we get,

R = 5% + 10% * ((0-50230)/(-24702-50230) = 11.7%

Prohect 23A

depreciation = 273630/9 = $30403 per year

Net cash flow = $20980 + $30403 = $51383

For 5%,

NPV = - 273630 + 51383 * PVIFA (5%, 9) = $91654

For 15%

NPV = - 273630 + 51383 * PVIFA (15%, 9) = -$28429

By interpolation we get,

R = 5% + 10% * ((0-91654)/(-28429-91654) = 12.63%

Project 24A

Depreciation = 280180/7 = $40026

Cash flow = 17950 + 40026=57976

for 5%

NPV = -280180 + 57976 *PVIFA (5%, 7) = $55326

for 15%

NPV = -280180 + 57976 *PVIFA (15%, 7) = $-38943

By interpolation

R=5% + 10% * ((0-55326)/(-38943-55326) = 10.87%

Project 22A and 23A should be chosen as the IRRs for those project are higher than the required rate of return of 11%

Rate NPV 5% 50230 R 0 15% -24702

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