Exercise 12-7 (Part Level Submission) Ueker Company is considering three capital

Question

Exercise 12-7 (Part Level Submission) Ueker Company is considering three capital expenditure projects. Relevant data for the projects are as follows. Project Investment Annual Life of 22A 23A 24A Income Project $242,490 $16,720 6 years 271,660 20,960 9 years 282,100 18,310 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. Ueker Company uses the straight-line method of depreciation. (Refer the below table) TABLE 4 Present Value of an Annuity of 1 Payments 5% 95238 4% 6% 7% 8% 9% 10% 11% 12% 15% 94340 0.93458.92593 .91743 .90909 90090 .89286 86957 1.88609 1.85941 1.83339 1.80802 1.78326 759 1.73554 1.71252 1.69005 .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 3.4651 3.38721 3.31213 3.23972 3.16986 3.10245 3.03735 2.85498 4.45182 4.32948 4.21236 4.10020 3.99271 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 7.360097.02358 6.71008 6.41766 6.14457 5.88923 5.65022 5.01877 96154 7 9 10

Explanation / Answer

1. Compuatation of PVIFA of IRR for 6 years = 242490 / 57135 = 4.244

Reference to Annuity Table in year 6 gives us

10% = 2.35526

11% = 2.23054

IRR= 10% + (2.35526 - 2.24416) / (2.35526 - 2.23054) * 1%

= 10.89%

2. Compuatation of PVIFA of IRR for 9 years = 271660 / 51144 = 5.31167

Reference to Annuity Table in year 9 gives us

12% = 5.32825

15% = 4.77158

IRR= 12% + (5.32825 - 5.31167) / (5.32825- 4.71158) * (15-12)%

= 12.08%

2. Compuatation of PVIFA of IRR for 7 years = 282100/ 58610 = 4.81317

Reference to Annuity Table in year 7 gives us

10% = 4.86842

11% = 4.71220

IRR= 10% + (4.86842 - 4.81317) / (4.86842 - 4.71220) * (11-10)%

= 10.35%

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