The Canyons Resort, a Utah ski resort, recently announced a $415 million expansion of lodging properties, lifts, and terrain

The Canyons 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.

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 2.

b. What are some uncertainties that could reduce the internal rate of return of this project?

Answer:

a. Present Value Factor for an 

Annuity of $1 for 10 Periods  = 

= 

Amount to Be Invested 

Annual Net Cash Flow 

$415 million 

$99 million 

= 4.192 

4.192 is the present value of an annuity factor for 10 years at 20% from Exhibit 2; 

thus, the internal rate of return on the cash flows for 10 years is 20%. 

b. There are many uncertainties that could adversely impact a project of this 

scale and scope. There are uncertainties affecting the initial investment and 

the annual cash flow assumptions. Regarding the initial investment, the 

construction cost could be higher than $415 million, due to delays, labor 

issues, and other construction site problems. The annual cash flow 

assumptions could be adversely impacted by uncertainties such as: 

1. warm weather conditions, or no snow. 

2. recessionary economic conditions that reduce the demand for ski holidays. 

3. competitor property improvements that siphon demand from the project. 

4. increased fuel costs that increase the cost of travel to ski resorts, thus 

reducing demand from non-local patrons. 

5. industry overbuilding that causes a price war to maintain volume.