Question

The Riverton Company, announced a $248,745 million expansion of lodging properties, ski lifts, and terrain in Park City, Utah. Assume that this investment is estimated to produce $69,000 million 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	3.353	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 seven years, using the present value of an annuity of $1 table above.
%

Answer 1

Ans.	Expected Internal rate of return   =   20%
	*Calculations and Explanations:
	Internal rate of return is a discount rate on which the present value of cash inflow
	equals to the project's initial investment and the net present value becomes zero (0).
	On this rate the calculated PV factor is equal to the present value of an annuity of $1
	at the ending year of the project's life.
	PV factor   =   Initial investment / Annual cash inflows
	$248,745 / $69,000
	3.605
	This PV factor is equal to the Present value of an annuity of $1 at the rate of 20% in
	7th year.
	So the answer (Internal rate of return) will be 20%.