Kindly Make the Answer Typed Or in Excel Leung Company is considering three capi

Question

Kindly Make the Answer Typed Or in Excel

Leung 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. Leung Company uses the straight-line method of depreciation. Determine the internal rate of return for each project. Round the internal rate of return factor to three decimals If Leung Company's required rate of return is 15%, which projects are acceptable? Assume the minimum cash payback period is 5 years. Would that criterion change your answer to (b), if at all? Show computations.

Explanation / Answer

a. determining IRR

As the question mentions about depreciation, we shall assume that the annual income shown here is including the depreciation amount. Hence inorder to arrive at the cash flows, depeciation to be added back.

The Cash flows for each project will be as follows

Using the IRR function in excel, the IRR of the above data can be arrived as

IRR of 32A = 10.859%

IRR of 33A = 11.858%

IRR of 34A = 9.887%

Note: alternatively, it can be also computed using Trial & Error method. I have done it bwlow for project 32A

IRR = 10% + 6072.23/(6072.23+974.61) = 10.861%

B.If Required Rate of Return is 15%

Accept the projects only if IRR>Required rate of return. In this case none of the project qualifies as IRR is < 15%

C. Cash Payback Period

Payback Period 32A = 4years + 14,000/(14,000+42,500) = 4.248 years

Payback Period 33A = 5years + 18,000/(18,000+32,400) = 5.357 years

Payback Period 34A = 4years + 50,800/(50,800+6,500) = 4.887 years

If only the the payback period is the criterion, Project 32A & 34A can be selected. However, still the IRR will be less than the required %.

Project Investment Life in Years Slvage value Depreciation per year Annual Income Annual Cash Flows 32A 2,40,000 6 -   40,000 16,500 56,500 33A 2,70,000 9 -   30,000 20,400 50,400 34A 2,80,000 7 -   40,000 17,300 57,300

Related Questions

Navigate

• Browse (All)
• Browse K
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.