Cantrell Company Is Considering Investing $396,000 in High-Tech Communications Equipment

Multiple Choice

Cantrell Company is considering investing $396,000 in high-tech communications equipment which would have an estimated life of 4 years and zero residual value. The technology manager says that it will return cash flows as shown below:
$$\begin{array} { | l | r | } \hline \text { Year 1 } & \$ 100,000 \\\hline \text { Year 2 } & \$ 200,000 \\\hline \text { Year 3 } & \$ 100,000 \\\hline \text { Year 4 } & \$ 50,000 \\\hline\end{array}$$
The VP Finance points out that the project must pass the company's 7% hurdle rate, and asks one of the analysts to calculate the internal rate of return before they discuss the project further. Using the tables below, please calculate the IRR for this project.
$$\begin{array} { | r | r | r | r | r | r | r | } \hline \text { Present Value of \$1 } & & & & & & \\\hline & 5 \% & 6 \% & 7 \% & 8 \% & 9 \% & 10 \% \\\hline 1 & 0.952 & 0.943 & 0.935 & 0.926 & 0.917 & 0.909 \\\hline 2 & 0.907 & 0.890 & 0.873 & 0.857 & 0.842 & 0.826 \\\hline 3 & 0.864 & 0.840 & 0.816 & 0.794 & 0.772 & 0.751 \\\hline 4 & 0.823 & 0.792 & 0.763 & 0.735 & 0.708 & 0.683 \\\hline 5 & 0.784 & 0.747 & 0.713 & 0.681 & 0.650 & 0.621 \\\hline\end{array}$$
Please choose the percentage below that comes closest to the actual IRR.

A) 5%
B) 6%
C) 7%
D) 8%