Internal Rate of Return Method for a Service Company

The Riverton Company, announced a $639,448 million expansion of lodging properties, ski lifts, and terrain in Park City, Utah. Assume that this investment is estimated to produce $134,000 million in equal annual cash flows for each of the first nine 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	3.353	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

a. Determine the expected internal rate of return of this project for nine years, using the present value of an annuity of $1 table above.

b. Identify the uncertainties that could reduce the internal rate of return of this project?

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