Exercise 24-7 Iggy Company is considering three capital expenditure projects. Re
ID: 2806028 • 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 Project Investment Income Project $240,400 16,700 6 years 273,200 20,740 9 years 281,300 15,700 7 years 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 Determine the internal rate of return for each project. (Round answers O decimal places, e.g. 10. For calculation purposes, use 5 decimal places as displayed in the factor table provided.) Internal Rate of Return Project 22A 23A 24A If Iggy Company's required rate of return is 11%, which projects are acceptable? The following project(s) are accetable By accessing this Question Assistance, you will learn while you earn points based on the Point Potential Policy set by your instructor.Explanation / 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.
First we need to find annual depreciation for each project.
Initial cost
Life
Annual depreciation (Initial cost/ life)
Net income
Cash flow (Net income + depreciation)
22A
240400
6
40066.66667
16700
56766.66667
23A
273200
9
30355.55556
20740
51095.55556
24A
281300
7
40185.71429
15700
55885.71429
IRR
Year
Projects
22A
23A
24A
0
-240400
-273200
-281300
1
56766.66667
51095.55556
55885.71429
2
56766.66667
51095.55556
55885.71429
3
56766.66667
51095.55556
55885.71429
4
56766.66667
51095.55556
55885.71429
5
56766.66667
51095.55556
55885.71429
6
56766.66667
51095.55556
55885.71429
7
51095.55556
55885.71429
8
51095.55556
9
51095.55556
IRR
10.96%
11.91%
9.00%
Formula
=IRR(B5:B14)
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Hope that helps.
Feel free to comment if you need further assistance J
Initial cost
Life
Annual depreciation (Initial cost/ life)
Net income
Cash flow (Net income + depreciation)
22A
240400
6
40066.66667
16700
56766.66667
23A
273200
9
30355.55556
20740
51095.55556
24A
281300
7
40185.71429
15700
55885.71429
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