Exercise 26-11

Iggy Company is considering three capital expenditure projects. Relevant data for the projects are as follows.

ProjectInvestmentAnnual

IncomeLife of

Project22A$242,300$17,4506 years23A274,20020,9209 years24A281,70015,7007 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.

Click here to view PV table.

Click here to view PV of Annuity table.

(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.)

ProjectInternal Rate of

Return22A

%23A

%24A

%

(b)

If Iggy Company?s required rate of return is 11%, which projects are acceptable?

The following project(s) are acceptable22A and 23A23A and 24A22A22A, 23A and 24A24A23A22A and 24A

Exercise 26- Exercise 26-11 Iggy Company is considering three capital expenditure projects. Relevant data for the projects are as follows. Annual Project 22A 23A 24A Investment $242,300 274,200 281,700 Income $17,450 20,920 15,700 Life of Project 6 years 9 years 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. Click here to view PV table. At bottom Click here to view PV of Annuity table. At bottom (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 Project 22A 23A 24A Investment $242,300 274,200 281,700 Annual Income $17,450 20,920 15,700 Life of Project 6 years 9 years 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. Click here to view PV table. Click here to view PV of Annuity table. (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 Table3Present Value of 1 (n) Periods 4% 5% 1 .96154 .95238 2 .92456 .90703 3 .88900 .86384 4 .85480 .82270 5 .82193 .78353 6 .79031 .74622 7 .75992 .71068 8 .73069 .67684 9 .70259 .64461 10 .67556 .61391 11 .64958 .58468 6% 7% . .93458 94340 . .87344 89000 . .81630 83962 . .76290 79209 . .71299 74726 . .66634 70496 . .62275 66506 . .58201 62741 . .54393 59190 . .50835 55839 . .47509 52679 8% 9% 10% 11% 12% . .89286 .86957 90090 . .82645 .79719 .75614 81162 . .75132 .71178 .65752 73119 . .68301 .63552 .57175 65873 . .62092 .56743 .49718 59345 . .56447 .50663 .43233 53464 . .51316 .45235 .37594 48166 . .46651 .40388 .32690 43393 . .42410 .36061 .28426 39092 . .38554 .32197 .24719 35218 . .35049 .28748 .21494 31728 .92593 .91743 .90909 .85734 .84168 .79383 .77218 .73503 .70843 .68058 .64993 .63017 .59627 .58349 .54703 .54027 .50187 .50025 .46043 .46319 .42241 .42888 .38753 15% Table3Present Value of 1 (n) Periods 4% 5% 1 .96154 .95238 2 .92456 .90703 12 .62460 .55684 13 .60057 .53032 14 .57748 .50507 15 .55526 .48102 16 .53391 .45811 17 .51337 .43630 18 .49363 .41552 19 .47464 .39573 20 .45639 .37689 6% 7% . .93458 94340 . .87344 89000 . .44401 49697 . .41496 46884 . .38782 44230 . .36245 41727 . .33873 39365 . .31657 37136 . .29586 35034 . .27615 33051 . .25842 31180 8% 9% 10% 11% 12% . .89286 .86957 90090 . .82645 .79719 .75614 81162 . .31863 .25668 .18691 28584 . .28966 .22917 .16253 25751 . .26333 .20462 .14133 23199 . .23939 .18270 .12289 20900 . .21763 .16312 .10687 18829 . .19785 .14564 .09293 16963 . .17986 .13004 .08081 15282 . .16351 .11611 .07027 13768 . .14864 .10367 .06110 12403 .92593 .91743 .90909 .85734 .84168 .39711 .35554 .36770 .32618 .34046 .29925 .31524 .27454 .29189 .25187 .27027 .23107 .25025 .21199 .23171 .19449 .21455 .17843 + 15% Table3Present Value of 1 (n) Periods 4% 1 .96154 2 .92456 5% 6% 7% 8% 9% 10% 11% 12% 15% . . .93458 .92593 .91743 .90909 .89286 .86957 94340 90090 . . .90703 .87344 .85734 .84168 .82645 .79719 .75614 89000 81162 .95238 Table4Present Value of an Annuity of 1 (n) Payment 4% 5% 6% 7% 8% 9% 10 % s 1 .96154 .95238 .94340 .93458 .92593 .91743 .90909 1.7832 1.7591 2 1.88609 1.85941 1.83339 1.80802 1.73554 6 1 2.5771 2.5313 3 2.77509 2.72325 2.67301 2.62432 2.48685 0 0 3.3121 3.2397 4 3.62990 3.54595 3.46511 3.38721 3.16986 3 2 3.9927 3.8896 5 4.45182 4.32948 4.21236 4.10020 3.79079 1 5 4.6228 4.4859 6 5.24214 5.07569 4.91732 4.76654 4.35526 8 2 5.2063 5.0329 7 6.00205 5.78637 5.58238 5.38929 4.86842 7 5 5.7466 5.5348 8 6.73274 6.46321 6.20979 5.97130 5.33493 4 2 6.2468 5.9952 9 7.43533 7.10782 6.80169 6.51523 5.75902 9 5 6.7100 6.4176 10 8.11090 7.72173 7.36009 7.02358 6.14457 8 6 7.1389 6.8051 11 8.76048 8.30641 7.88687 7.49867 6.49506 6 9 7.5360 7.1607 12 9.38507 8.86325 8.38384 7.94269 6.81369 8 3 7.9037 7.4869 13 9.98565 9.39357 8.85268 8.35765 7.10336 8 0 10.5631 8.2442 7.7861 14 9.89864 9.29498 8.74547 7.36669 2 4 5 11.1183 10.3796 8.5594 8.0606 15 9.71225 9.10791 7.60608 9 6 8 9 11.6523 10.8377 8.8513 8.3125 16 10.10590 9.44665 7.82371 0 7 7 6 17 12.1656 11.2740 10.47726 9.76322 9.1216 8.5436 8.02155 11% 12% .90090 1.7125 2 2.4437 1 3.1024 5 3.6959 0 4.2305 4 4.7122 0 5.1461 2 5.5370 5 5.8892 3 6.2065 2 6.4923 6 6.7498 7 6.9818 7 7.1908 7 7.3791 6 7.5487 .89286 1.6900 5 2.4018 3 3.0373 5 3.6047 8 4.1114 1 4.5637 6 4.9676 4 5.3282 5 5.6502 2 5.9377 0 6.1943 7 6.4235 5 6.6281 7 6.8108 6 6.9739 9 7.1196 Table3Present Value of 1 (n) Periods 4% 1 .96154 2 .92456 18 19 20 7 12.6593 0 13.1339 4 13.5903 3 5% 6% 7% 8% 9% 10% 11% 12% 15% . . .93458 .92593 .91743 .90909 .89286 .86957 94340 90090 . . .90703 .87344 .85734 .84168 .82645 .79719 .75614 89000 81162 7 4 3 9 3 11.6895 10.0590 9.3718 8.7556 7.7016 7.2496 10.82760 8.20141 9 9 9 3 2 7 12.0853 10.3356 9.6036 8.9501 7.8392 7.3657 11.15812 8.36492 2 0 0 2 9 8 12.4622 10.5940 9.8181 9.1285 7.9633 7.4694 11.46992 8.51356 1 1 5 5 3 4 .95238