Ueker Company is considering three capital expenditure projects. Relevant data f
ID: 2497024 • Letter: U
Question
Ueker Company is considering three capital expenditure projects. Relevant data for the projects are as follows.
A) Determine the internal rate of return for each project.
B) If Ueker Company’s required rate of return is 11%, which projects are acceptable?
Ueker Company is considering three capital expenditure projects. Relevant data for the projects are as follows. roject Investment Annual Life of Income 22A 23A 24A Project $242,990 $16,940 6 years 274,76020,870 9 years 280,690 18,140 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. Ueker Company uses the straight-line method of depreciation. (Refer the below table)Explanation / Answer
A) Project Investment Depriciation Annual Cash Inflow IRR Income A B A +B 22A 242990 242990/6 = 40498.33 16940 57438.33 11% Refer working below 23A 274760 274760/9 = 31187.78 20870 52057.78 12% Refer working below 24A 280690 280690/7 = 40098.57 18140 58238.57 10% Refer working below Let I = 11% , then NPV = R * ( 1 - (1+I)-n)/i Discounting factor from present value table for 11% for 6 years = 0.535 Discounting factor from present value table for 11% for 9 years = 0.391 Discounting factor from present value table for 11% for 7 years = 0.482 Discounting factor from present value table for 10% for 6 years = 0.564 Discounting factor from present value table for 10% for 9 years = 0.424 Discounting factor from present value table for 10% for 7 years = 0.513 Discounting factor from present value table for 12% for 6 years = 0.507 Discounting factor from present value table for 12% for 9 years = 0.361 Discounting factor from present value table for 12% for 7 years = 0.452 NPV @ 11% 22A 57438 * ( 1- 0.535)/.11-242990 = 57438 * 0.465/.11-242990 = 57438 * 4.23 - 242990 = 242963 - 242990 = -27 As IRR is where NPV = 0 , IRR for this project = 11% 23A NPV at 11% 51399 * ( 1- 0.391)/.11-274760 = 51399 * 0.609/.11-274760 = 51399 * 5.54 - 274760 = 284750 - 274760 = 9990 As NPV is positive , 11% is not the IRR for project 23 A Let I = 12% then NPV at 12% 51399 * ( 1- 0.361)/.12-274760 5.325 = 51399 * 0.639/.12-274760 273699.7 = 51399 * 5.325 - 274760 = 273700 - 274760 = 1000 This NPV is close to 0 , hence IRR for project 23A = 12% 24A NPV AT 10% 58239 * ( 1- 0.513)/.10-280690 = 58239 * 0.487/.10-280690 = 58239 * 4.87 - 280690 = 283624 - 280690 = 2934 This NPV is close to 0 , hence IRR for project 23A = 10% B) If the company's required rate of return = 11% , then project 22A and 23 A are acceptable as their IRR is equal to or greater than the required return Project 24A IRR is lower than required rate of return , hence 24A is not acceptable
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