Internal Rate of Return Method for a Service Company The Riverton Company, a ski

Question

Internal Rate of Return Method for a Service Company

The Riverton Company, a ski resort, recently announced a $500,825 expansion to lodging properties, lifts, and terrain. Assume that this investment is estimated to produce $115,000 in equal annual cash flows for each of the first six years of the project life.

a. Determine the expected internal rate of return of this project for six years, using the present value of an annuity of $1 table above. If required, round your final answer to the nearest whole percent.
%_____________

b. Indentify the uncertainties that could reduce the internal rate of return of this project?
All of these

Present Value of an Annuity of $1 at Compound Interest Year 6% 10% 12% 15% 20% 1 0.943 0.909 0.893 0.870 0.833 2 1.833 1.736 1.690 1.626 1.528 3 2.673 2.487 2.402 2.283 2.106 4 3.465 3.170 3.037 2.855 2.589 5 4.212 3.791 3.605 3.353 2.991 6 4.917 4.355 4.111 3.785 3.326 7 5.582 4.868 4.564 4.160 3.605 8 6.210 5.335 4.968 4.487 3.837 9 6.802 5.759 5.328 4.772 4.031 10 7.360 6.145 5.650 5.019 4.192

Explanation / Answer

a

PV factor for internal rate of return=500825/115000=4.355

Internal rate of return = 10%

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