# Question

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.

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.

## Answer to relevant Questions

Refer to the Bear Valley Data Set in E12- 32A. Assume that the expansion has zero residual value. Requirements 1. Will the payback period change? Explain and recalculate if necessary. 2. Will the project’s ARR change? ...Refer to the Turner Hardware information in E12- 37B. Compute the ARR for the investment.In E12- 37BTurner Hardware is adding a new product line that will require an investment of $ 1,450,000. Managers estimate that this ...Use the NPV method to determine whether Smith Products should invest in the following projects: • Project A costs $ 260,000 and offers seven annual net cash inflows of $ 59,000. Smith Products requires an annual return of ...The following table contains information about four projects in which Andrews Corporation has the opportunity to invest. This information is based on estimates that different managers have prepared about the company’s ...1. Describe the capital budgeting process in your own words. 2. Define capital investment. List at least three examples of capital investments other than the examples provided in the chapter. 3. “As the required rate of ...Post your question

0