Exercise 24-7 Open Show Work Exercise 24-7 Iggy Company is considering three cap
ID: 2586724 • Letter: E
Question
Exercise 24-7
Open Show Work
Exercise 24-7
Iggy Company is considering three capital expenditure projects. Relevant data for the projects are as follows.Project Investment Annual
Income Life of
Project 22A $242,300 $17,450 6 years 23A 274,200 20,920 9 years 24A 281,700 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.
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(a)
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 Internal Rate of
Return 22A % 23A % 24A %
(b)
If Iggy Company’s required rate of return is 11%, which projects are acceptable?
The following project(s) are acceptable
22A and 23A22A and 24A23A24A22A, 23A and 24A23A and 24A22A
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Explanation / Answer
A-
Project 22 A
Project 23 A
Project 24 A
-240000
Year
cash flow
Year
cash flow
Year
cash flow
56700
0
-242300
0
-274200
0
-281700
56700
1
57833.33
1
51386.67
1
55942.86
56700
2
57833.33
2
51386.67
2
55942.86
56700
3
57833.33
3
51386.67
3
55942.86
56700
4
57833.33
4
51386.67
4
55942.86
56700
5
57833.33
5
51386.67
5
55942.86
11%
6
57833.33
6
51386.67
6
55942.86
7
51386.67
7
55942.86
IRR using MS excel spreadshett using IRR function = irr(-242300,57833.33,57833.33,57833.33,57833.33,57833.33,57833.33)
11.34%
8
51386.67
9
51386.67
IRR using MS excel spreadsheet using IRR function = irr(-281700,55942.86,55942.86,55942.86,55942.86,55942.86,55942.8655942.86)
8.98%
IRR using MS excel spreadshett using IRR function = irr(-274200,51386.67,51386.67,51386.67,51386.67,51386.67,51386.67,51386.67,51386.67,51386.67)
11.96%
cash flow of 22 A
17450+(242300/6)
57833.33
cash flow of 23 A
20920+(274200/9)
51386.67
cash flow of 24 A
15700+(281700/7)
55942.86
B-
project 22A and 23 A would be accepted as their IRR is greater than required rate of return of 11%
A-
Project 22 A
Project 23 A
Project 24 A
-240000
Year
cash flow
Year
cash flow
Year
cash flow
56700
0
-242300
0
-274200
0
-281700
56700
1
57833.33
1
51386.67
1
55942.86
56700
2
57833.33
2
51386.67
2
55942.86
56700
3
57833.33
3
51386.67
3
55942.86
56700
4
57833.33
4
51386.67
4
55942.86
56700
5
57833.33
5
51386.67
5
55942.86
11%
6
57833.33
6
51386.67
6
55942.86
7
51386.67
7
55942.86
IRR using MS excel spreadshett using IRR function = irr(-242300,57833.33,57833.33,57833.33,57833.33,57833.33,57833.33)
11.34%
8
51386.67
9
51386.67
IRR using MS excel spreadsheet using IRR function = irr(-281700,55942.86,55942.86,55942.86,55942.86,55942.86,55942.8655942.86)
8.98%
IRR using MS excel spreadshett using IRR function = irr(-274200,51386.67,51386.67,51386.67,51386.67,51386.67,51386.67,51386.67,51386.67,51386.67)
11.96%
cash flow of 22 A
17450+(242300/6)
57833.33
cash flow of 23 A
20920+(274200/9)
51386.67
cash flow of 24 A
15700+(281700/7)
55942.86
B-
project 22A and 23 A would be accepted as their IRR is greater than required rate of return of 11%
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