Exercise 26-7 Iggy Company is considering three capital expenditure projects. Re
ID: 2527598 • Letter: E
Question
Exercise 26-7 Iggy Company is considering three capital expenditure projects. Relevant data for the projects are as follows. Project Investment Annual Income Life of Project 22A $241,900 $17,500 6 years 23A 270,900 20,780 9 years 24A 282,000 15,700 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. Iggy Company uses the straight-line method of depreciation.
Iggy Company is considering three capital expenditure projects. Relevant data for the projects are as follows Annual Life of Project Investment Income Project $241,900 $17,500 6 years 270,900 20,780 9 years 15,700 7 years 22A 23A 24A 282,000 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. Iggy Company uses the straight line method of depreciation. Determine the internal rate of return for each project. (Round answers 0 decimal places, e.g. 10. For calculation purposes, use 5 decimal places as displayed in the factor table provided.) Project 22A 23A 24A Internal Rate of Return If Iggy Company's required rate of return is 11%, which projects are acceptable? The following project(s) are acceptableExplanation / Answer
Answer a.
Project 22A:
Investment = $241,900
Life of Project = 6 years
Annual Depreciation = $241,900 / 6
Annual Depreciation = $40,316.67
Annual Net Cash Flow = Annual Income + Annual Depreciation
Annual Net Cash Flow = $17,500 + $40,316.67
Annual Net Cash Flow = $57,816.67
IRR Factor = Investment / Annual Net Cash Flow
IRR Factor = $241,900 / $57,816.67
IRR Factor = 4.18391
Using Table 4, IRR is 11%
Project 23A:
Investment = $270,900
Life of Project = 9 years
Annual Depreciation = $270,900 / 6
Annual Depreciation = $30,100
Annual Net Cash Flow = Annual Income + Annual Depreciation
Annual Net Cash Flow = $20,780 + $30,100
Annual Net Cash Flow = $50,880
IRR Factor = Investment / Annual Net Cash Flow
IRR Factor = $270,900 / $50,880
IRR Factor = 5.32429
Using Table 4, IRR is 12%
Project 24A:
Investment = $282,000
Life of Project = 7 years
Annual Depreciation = $282,000 / 7
Annual Depreciation = $40,285.71
Annual Net Cash Flow = Annual Income + Annual Depreciation
Annual Net Cash Flow = $15,700 + $40,285.71
Annual Net Cash Flow = $55,985.71
IRR Factor = Investment / Annual Net Cash Flow
IRR Factor = $282,000 / $55,985.71
IRR Factor = 5.03700
Using Table 4, IRR is 9%
Answer b.
Iggy Company’s required rate of return is 11%.
So, Project 22A and Project 23A are acceptable
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