Consider how Flint Valley, a popular ski resort could use capital budgeting to decide whether the $8-million Snow Park Lodge expansion would be a good investment.
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. 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.