Refer to Short Exercise S26-4. Assume the expansion has no residual value. What is the projects NPV
Question:
Refer to Short Exercise S26-4. Assume the expansion has no residual value. What is the project’s NPV (round to nearest dollar)? Is the investment attractive? Why or why not?
Data from Short Exercise S26-4
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:
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.
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%
Step by Step Answer:
Time Net Cash Inflow Annuity PV Factor i 10n 10 Present Value 1 10 years ...View the full answer
Horngrens Financial and Managerial Accounting
ISBN: 978-0133255584
4th Edition
Authors: Tracie L. Nobles, Brenda L. Mattison, Ella Mae Matsumura
Related Video
NPV stands for \"Net Present Value,\" which is a financial concept used to determine the value of an investment or project. It measures the difference between the present value of cash inflows and the present value of cash outflows over a given period of time, using a specific discount rate. To calculate the NPV of an investment, you need to first estimate the cash inflows and outflows associated with the investment, and then discount them back to their present values using a discount rate. The discount rate represents the cost of capital or the expected rate of return required by investors. The formula for calculating NPV is: NPV = sum of (cash inflows / (1 + discount rate)^t) - sum of (cash outflows / (1 + discount rate)^t) Where: Cash inflows: the expected cash received from the investment Cash outflows: the expected cash paid out for the investment Discount rate: the required rate of return or the cost of capital t: the time period in which the cash flow occurs If the NPV is positive, it means that the investment is expected to generate a return higher than the required rate of return or the cost of capital, and it may be considered a good investment. If the NPV is negative, it means that the investment is not expected to generate a return higher than the required rate of return or the cost of capital, and it may be considered a bad investment.
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