Internal Rate of Return Method for a Service Company

The Riverton Company, a ski resort, recently announced a $335,265 expansion to lodging properties, lifts, and terrain. Assume that this investment is estimated to produce $93,000 in equal annual cash flows for each of the first seven years of the project life.

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	3.352	2.991
6	4.917	4.355	4.111	3.784	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

a. Determine the expected internal rate of return of this project for seven 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? ____________

Options:

Warm weather conditions, or no snow

Recessionary economic conditions that reduce the demand for ski holidays

Competitor property improvements that siphon demand from the project

Increased fuel costs that increase the cost of travel to ski resorts, thus reducing demand from nonlocal patrons

Industry overbuilding that causes a price war to maintain volume

All of these