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Iggy Company is considering three capital expenditure projects. Relevant data for the projects are as follows.
Project Investment Annual income Life of project
22A $242,200 $16,890 6 years
23A $271,500 $20,710 9 years
24A $283,000 $15,700 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.
Required:
Determine the internal rate of return for each project.

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Answer:

Depreciation amount has to be added back to the annual income because it is a non cash expense.

Project 22A

Depreciation = 242,000 / 6 years

= $40,333.33

Annual income = 40,333.33 + 16,890

= $57,223.33

IRR using Excel is:

= 11%

Project 23A

Annual income = 20,710 + 271,500 / 9 years

= $50,876.67

IRR = 12%

Project 24A

Annual income = 15,700 + 283,000 / 7 years

= $56,128.57

IRR = 9%

Note: Look at the formula bar to see how IRR was calculated.

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