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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Definitions:

Net Exports

The difference between a country's total value of exports and total value of imports. Positive net exports indicate a trade surplus, while negative net exports indicate a trade deficit.

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The cost of borrowing money, typically expressed as a percentage of the total amount loaned.

Federal Open Market Committee

The branch of the Federal Reserve Board that determines the direction of monetary policy, specifically by directing open market operations.

Secretary of the Treasury

A key cabinet position in the United States responsible for managing the federal finances, including producing currency, collecting taxes, and paying government bills.