Consider how Hope Valley, a popular ski resort, could use capital budgeting to decide whether the $10 million Blizzard Park Lodge expansion would be a good investment.
Hope Valley Data Set
Assume that Hope Valley's managers developed the following estimates concerning a planned expansion of its Blizzard Park Lodge (all numbers assumed):
Number of additional skiers per day............................................................................. 110
Average number of days per year that weather
conditions allow skiing at Hope Valley .......................................................... 125
Useful life of expansion (in years) ................................................................................... 8
Average cash spent by each skier per day ................................................................. $ 230
Average variable cost of serving each skier per day ................................................. $ 130
Cost of expansion ............................................................................................. $5,500,000
Discount rate ............................................................................................................... 12%
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.