1)Omega Company is considering three capital expenditure projects. Relevant data
ID: 2389746 • Letter: 1
Question
1)Omega Company is considering three capital expenditure projects. Relevant data for the projects are as follows.Project Investment Annual Income Life of invest.
22A $240,000 $13,300 6 years
23A 270,000 21,000 9 years
24A 288,000 20,000 8 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. Omega Company uses the straight-line method of depreciation.
Determine the internal rate of return for each project. (Round the internal rate of return factor to three decimals, e.g. 2.225 and your answer to 0 decimal places, e.g. 2,510.)
a) Project 22A ______%
b) Project 23A_______%
c) Project 24A________%
d)If Omega Company's minimum required rate of return is 11%, which projects are acceptable?
Explanation / Answer
Annual depreciation for 22A= $240,000/6 =$40000 Annual depreciation for 23A =270,000/9=$30000 Annual depreciation for 24A =288,000/8 = $36000 IRR for 22A NPV =0 -$240,000 +$13,300/(1+r) +$13,300/(1+r)^2 ....$13,300/(1+r)^6 =0 r =-24.6% IRR for 23A NPV =0 -270,000 +$21,000/(1+r) +$21,000/(1+r)^2 ....$21,000/(1+r)^9 =0 r =-6.6% IRR for 24A NPV =0 -288,000 +$20,000/(1+r) +$20,000/(1+r)^2 ....$20,000/(1+r)^8 =0 r =-11.49%
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