Consider how Bear Valley, a popular ski resort, could use capital budgeting to decide whether the $ 8.5 million Autumn Park Lodge expansion would be a good investment.
Requirements
1. Compute the average annual net cash inflow from the expansion.
2. Compute the average annual operating income from the expansion.
3. Compute the payback period.
4. Compute the ARR.
Assume that Bear Valley’s managers developed the following estimates concerning a planned expansion to its Autumn Park Lodge (all numbers assumed):
Number of additional skiers per day......................................................... 117
Average number of days per year that weather conditions allow
skiing at Bear Valley............................................................................... 162
Useful life of expansion (in years).............................................................. 10
Average cash spent by each skier per day................................................ $ 245
Average variable cost of serving each skier per day................................ $ 140
Cost of expansion..................................................................................... $ 8,500,000
Discount rate............................................................................................. 10%
Assume that Autumn Valley uses the straight- line depreciation method and expects the lodge expansion to have a residual value of $ 700,000 at the end of its ten- year life.