# Question

Refer to the Flint Valley Expansion Data Set. Assume that the expansion has zero residual value.

Flint Valley Expansion Data Set

Assume that Flint Valley’s managers developed the following estimates concerning the expansion (all numbers assumed):

Number of additional skiers per day.................................................. 125

Average number of days per year that weather

conditions allow skiing at Flint Valley................................................ 160

Useful life of expansion (in years)....................................................... 8

Average cash spent by each skier per day........................................... $ 240

Average variable cost of serving each skier per day........................... $ 140

Cost of expansion............................................................................. $ 8,000,000

Discount rate...................................................................................... 12%

Assume that Flint Valley uses the straight-line depreciation method and expects the lodge expansion to have a residual value of $960,000 at the end of its eight-year life.

Requirements

1. Will the payback period change? Explain and recalculate if necessary.

2. Will the project’s ARR change? Explain and recalculate if necessary.

3. Assume that Flint Valley screens its potential capital investments using a five-year minimum payback period and a 10% minimum ARR. Will Flint Valley consider this project further or reject it?

Flint Valley Expansion Data Set

Assume that Flint Valley’s managers developed the following estimates concerning the expansion (all numbers assumed):

Number of additional skiers per day.................................................. 125

Average number of days per year that weather

conditions allow skiing at Flint Valley................................................ 160

Useful life of expansion (in years)....................................................... 8

Average cash spent by each skier per day........................................... $ 240

Average variable cost of serving each skier per day........................... $ 140

Cost of expansion............................................................................. $ 8,000,000

Discount rate...................................................................................... 12%

Assume that Flint Valley uses the straight-line depreciation method and expects the lodge expansion to have a residual value of $960,000 at the end of its eight-year life.

Requirements

1. Will the payback period change? Explain and recalculate if necessary.

2. Will the project’s ARR change? Explain and recalculate if necessary.

3. Assume that Flint Valley screens its potential capital investments using a five-year minimum payback period and a 10% minimum ARR. Will Flint Valley consider this project further or reject it?

## Answer to relevant Questions

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