Exercise 24-7 Iggy Company is considering three capital expenditure projects. Re
ID: 2596449 • Letter: E
Question
Exercise 24-7 Iggy Company is considering three capital expenditure projects. Relevant data for the projects are as follows Annual Life of ProjectInvestment Income Project $244,100 $17,140 6 years 273,500 20,740 9 years 280,600 15,700 7 years 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. Iggy Company uses the straight-line method of depreciation. Click here to view Py takle 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 22A 23A 24A Return If Iggy Company's required rate of return is 11%, which projects are acceptable? The following project(s) are acceptableExplanation / Answer
Internal rate of return is the rate at which if we discount all the future cash flows, the resulting NPV will be zero, it is minimum rate of return that management seeks from the project, IRR of the asset/project must be greater than the required rate of return, otherwise it will not be feasible for the management to accept the project. Best way to calculate IRR is using Excel.
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Project
22A
23A
24A
Initial cost
244100
273500
280600
Annual depreciation
40683.33
30388.89
40085.71
Net income
17140
20740
15700
Operating cash flow
57823.33
51128.89
55785.71
IRR
22A
23A
24A
Initial cash out flow
-244100
-273500
-280600
Annual cash inflow (1)
57823.33
51128.89
55785.71
2
57823.33
51128.89
55785.71
3
57823.33
51128.89
55785.71
4
57823.33
51128.89
55785.71
5
57823.33
51128.89
55785.71
6
57823.33
51128.89
55785.71
7
51128.89
55785.71
8
51128.89
9
51128.89
IRR
11.07%
11.90%
9.02%
Formula
=IRR(B10:B19)
Project 22A and 23A has IRR above required rate
Project 23A has highest IRR so it should be selected.
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Hope that helps.
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Project
22A
23A
24A
Initial cost
244100
273500
280600
Annual depreciation
40683.33
30388.89
40085.71
Net income
17140
20740
15700
Operating cash flow
57823.33
51128.89
55785.71
IRR
22A
23A
24A
Initial cash out flow
-244100
-273500
-280600
Annual cash inflow (1)
57823.33
51128.89
55785.71
2
57823.33
51128.89
55785.71
3
57823.33
51128.89
55785.71
4
57823.33
51128.89
55785.71
5
57823.33
51128.89
55785.71
6
57823.33
51128.89
55785.71
7
51128.89
55785.71
8
51128.89
9
51128.89
IRR
11.07%
11.90%
9.02%
Formula
=IRR(B10:B19)
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