# Question

Consider how Smith Valley Snow Park Lodge could use capital budgeting to decide whether the $ 13,500,000 Snow Park Lodge expansion would be a good investment. Assume Smith Valley’s managers developed the following estimates concerning the expansion:

Number of additional skiers per day 117 skiers

Average number of days per year that weather conditions allow skiing at Smith Valley 142 days

Useful life of expansion (in years) 10 years

Average cash spent by each skier per day $ 236

Average variable cost of serving each skier per day 76

Cost of expansion 13,500,000

Discount rate 10%

Assume that Smith Valley uses the straight- line depreciation method and expects the lodge expansion to have a residual value of $ 1,000,000 at the end of its 10- year life.

Requirements

1. Compute the average annual net cash inflow from the expansion.

2. Compute the average annual operating income from the expansion.

Number of additional skiers per day 117 skiers

Average number of days per year that weather conditions allow skiing at Smith Valley 142 days

Useful life of expansion (in years) 10 years

Average cash spent by each skier per day $ 236

Average variable cost of serving each skier per day 76

Cost of expansion 13,500,000

Discount rate 10%

Assume that Smith Valley uses the straight- line depreciation method and expects the lodge expansion to have a residual value of $ 1,000,000 at the end of its 10- year life.

Requirements

1. Compute the average annual net cash inflow from the expansion.

2. Compute the average annual operating income from the expansion.

## Answer to relevant Questions

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