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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Internal rate of return method for a service company

 Park City Mountain Resort, a Utah ski resort, recently announced a $415 million expansion of lodging properties, lifts, and terrain. Assume that this investment is estimated to produce $99 million in equal annual cash flows for each of the first 10 years of the project life.

  1. a. Determine the expected internal rate of return of this project for 10 years, using the present value of an annuity of $1 table found in Exhibit 5.
  2. b. What are some uncertainties that could reduce the internal rate of return of this project?

a.

To determine

Internal rate of return method:

Internal rate of return method is one of the capital investment methods which determine the rate of return, wherein the net present value of all the cash flows (both positive and negative) from an investment is zero. This method is also called as the time-adjusted rate of return method. It used to evaluate the different proposal’s expected rate of return.

To determine: The internal rate of return for the given project

Explanation

When the annual cash flows are equal, the internal rate of return can determined as follows:

Present value factor for an annuity of $1}=Amount to be invested

b.

To determine

To identify:  The uncertainties that could reduce the internal rate of return of the PC Mountain Resort.

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