MacNamara Development Company Is Evaluating a Possible Investment in a Construction

question 103

Multiple Choice

MacNamara Development Company is evaluating a possible investment in a construction project. The cost will be $100,000, and it will generate cash flows as follows:
$$\begin{array} { | r | r | } \hline \text { Year 1 } & \$ 10,000 \\\hline \text { Year 2 } & \$ 20,000 \\\hline \text { Year 3 } & \$ 30,000 \\\hline \text { Year 4 } & \$ 40,000 \\\hline \text { Year 5 } & \$ 35,000 \\\hline\end{array}$$
The VP for construction believes this project has an internal rate of return somewhere in the range of 7% to 10%, but has asked the Controller to crunch the numbers. Using the trial and error method, and the PV factors shown here, determine what the IRR of this project is.
$\begin{array}{|c|c|c|c|c|c|c|}\hline \text {Present Value of}\\ \text {an Annuity of }\\\$1\\\hline&5\%&6\%&7\%&8\%&9\%&10\%\\\hline1 & 0.952& 0.943 & 0.935 & 0.926 & 0.917 & 0.909 \\\hline 2& 0.907 & 0.890 & 0.873 & 0.857 & 0.847 & 0.826 \\\hline 3& 0.864 & 0.840 & 0.816 & 0.794 & 0.771 & 0.751 \\\hline 4& 0.823 & 0.792 & 0.763 & 0.735 & 0.708 &0.683 \\\hline 5& 0.784 & 0.747 & 0.713 & 0.681 & 0.650 &0.621 \\\hline\end{array}$

Choose the rate below which comes closest to the actual IRR.

• A) 7%
• B) 8%
• C) 9%
• D) 10%

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1947

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