Question
In: Accounting
Internal Rate of Return Method for a Service Company The Riverton Company, a ski resort, recently...
Internal Rate of Return Method for a Service Company
The Riverton Company, a ski resort, recently announced a $368,830 expansion to lodging properties, lifts, and terrain. Assume that this investment is estimated to produce $110,000 in equal annual cash flows for each of the first five 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
five years, using the present value of an annuity of $1 table
above. If required, round your final answer to the nearest whole
percent.
Solutions
Expert Solution
Correct Answer:
IRR = 15%
Working:
IRR =R1+ NPV1/ (NPV1-NPV2) * (R2-R1)
|
Cash inflow(outflow) |
PV of annuity @ 12% |
Present value |
|
|
Cash outflow |
$ (368,830.00) |
1 |
$ (368,830.00) |
|
Cash inflow |
$ 110,000.00 |
3.605 |
$ 396,550.00 |
|
NPV 1 |
$ 27,720.00 |
|
Cash inflow(outflow) |
PV of annuity @ 20% |
Present value |
|
|
Cash outflow |
$ (368,830.00) |
1 |
$ (368,830.00) |
|
Cash inflow |
$ 110,000.00 |
2.991 |
$ 329,010.00 |
|
NPV 2 |
$ (39,820.00) |
|
A |
R1 |
12% |
|
B |
R1 |
20% |
|
C |
NPV1 |
$ 27,720.00 |
|
D |
NPV2 |
$ (39,820.00) |
|
E =C-D |
NPV1-NPV2 |
$ 67,540.00 |
|
F =C/D |
NPV1/NPV1-NPV2 |
0.41042 |
|
G = A-B |
R2-R1 |
8% |
|
H =F*G |
NPV1/(NPV1-NPV2) * (R2-R1) |
0.03 |
|
I = A+H |
IRR |
15% |
End of answer.
Thanks.
ekkarill92 answered 1 year agoRelated Solutions
Internal Rate of Return Method for a Service Company The Riverton Company, announced a $608,580 million...
Internal Rate of Return Method for a Service Company
The Riverton Company, announced a $608,580 million expansion of
lodging properties, ski lifts, and terrain in Park City, Utah.
Assume that this investment is estimated to produce $98,000 million
in equal annual cash flows for each of the first eight 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...
Net Present Value Method, Internal Rate of Return Method, and Analysis for a Service Company The...
Net Present Value Method, Internal Rate of Return Method, and
Analysis for a Service Company
The management of Advanced Alternative Power Inc. is considering
two capital investment projects. The estimated net cash flows from
each project are as follows:
Year
Wind
Turbines
Biofuel Equipment
1
$180,000
$360,000
2
180,000
360,000
3
180,000
360,000
4
180,000
360,000
The wind turbines require an investment of $466,020, while the
biofuel equipment requires an investment of $1,027,800. No residual
value is expected from either...
Net Present Value Method, Internal Rate of Return Method, and Analysis for a Service Company The...
Net Present Value Method, Internal Rate of Return Method, and
Analysis for a Service Company
The management of Advanced Alternative Power Inc. is considering
two capital investment projects. The estimated net cash flows from
each project are as follows:
Year
Wind
Turbines
Biofuel Equipment
1
$390,000
$740,000
2
390,000
740,000
3
390,000
740,000
4
390,000
740,000
The wind turbines require an investment of $1,184,430, while the
biofuel equipment requires an investment of $2,112,700. No residual
value is expected from either...
Net Present Value Method, Internal Rate of Return Method, and Analysis for a Service Company The...
Net Present Value Method, Internal Rate of Return Method, and
Analysis for a Service Company
The management of Advanced Alternative Power Inc. is considering
two capital investment projects. The estimated net cash flows from
each project are as follows:
Year
Wind
Turbines
Biofuel Equipment
1
$390,000
$740,000
2
390,000
740,000
3
390,000
740,000
4
390,000
740,000
The wind turbines require an investment of $1,184,430, while the
biofuel equipment requires an investment of $2,112,700. No residual
value is expected from either...
Net Present Value Method, Internal Rate of Return Method, and Analysis for a Service Company The...
Net Present Value Method, Internal Rate of Return Method, and
Analysis for a Service Company
The management of Style Networks Inc. is considering two TV show
projects. The estimated net cash flows from each project are as
follows:
Year
After Hours
Sun Fun
1
$320,000
$290,000
2
320,000
290,000
3
320,000
290,000
4
320,000
290,000
After Hours requires an investment of $913,600, while
Sun Fun requires an investment of $880,730. No residual
value is expected from either project.
Present Value...
Net Present Value Method, Internal Rate of Return Method, and Analysis for a Service Company The...
Net Present Value Method, Internal Rate of Return Method, and
Analysis for a Service Company
The management of Advanced Alternative Power Inc. is considering
two capital investment projects. The estimated net cash flows from
each project are as follows:
Year Wind Turbines Biofuel Equipment
1 $420,000 $800,000
2 420,000 800,000
3 420,000 800,000
4 420,000 800,000
The wind turbines require an investment of $1,275,540, while the
biofuel equipment requires an investment of $2,284,000. No residual
value is expected from either...
Net Present Value Method and Internal Rate of Return Method for a service company Keystone Healthcare...
Net Present Value
Method and Internal Rate of Return Method for a service company
Keystone Healthcare
Corp. is proposing to spend $128,960 on a seven-year project that
has estimated net cash flows of $31,000 for each of the seven
years.
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...
Net Present Value Method and Internal Rate of Return Method for a Service Company Buckeye Healthcare...
Net Present Value Method and Internal Rate of Return Method for
a Service Company Buckeye Healthcare Corp. is proposing to spend
$186,725 on an eight-year project that has estimated net cash flows
of $35,000 for each of the eight years:
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...
Net Present Value Method and Internal Rate of Return Method for a Service Company Buckeye Healthcare...
Net Present Value Method and Internal Rate of Return Method for
a Service Company Buckeye Healthcare Corp. is proposing to spend
$186,725 on an eight-year project that has estimated net cash flows
of $35,000 for each of the eight years. 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...
Net Present Value Method and Internal Rate of Return Method for a service company Keystone Healthcare...
Net Present Value Method and Internal Rate of Return Method for
a service company
Keystone Healthcare Corp. is proposing to spend $138,216 on a
nine-year project that has estimated net cash flows of $24,000 for
each of the nine years.
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...
ADVERTISEMENT
ADVERTISEMENT
Latest Questions
- Question: what is the difference between rights of assertion and observation assertion. Include which financial statements...
- how to read a csv file in php and make a html table? I can't use...
- ABC Inc. is evaluating a project that will increase annual sales by $230,000 and annual cash...
- Identify the behavior, values, and consumption patterns from people in New York City versus Milan Italy.
- A stock has a required return of 10%, the risk-free rate is 4.5%, and the market...
- How do the media options available to advertisers vary in different parts of the world? (Choose...
- Charming Paper Company sells to the 12 accounts listed here. Account Receivable Balance Outstanding Average...
ADVERTISEMENT