Consider how Hunter Valley Snow Park Lodge could use capital budgeting to decide whether the $11,000,000 Snow Park Lodge expansion would be a good investment. Assume Hunter Valley's managers developed the following estimates concerning the expansion:

Number of additional skiers per day ................................................ 121 skiers

Average number of days per year that weather conditions

allow skiing at Hunter Valley ....................................................... 142 days

Useful life of expansion (in years) ................................................... 7 years

Average cash spent by each skier per day ........................................... $ 241

Average variable cost of serving each skier per day ................................... 83

Cost of expansion ................................................................ 11,000,000

Discount rate .............................................................................. 10%

Assume that Hunter Valley uses the straight-line depreciation method and expects the lodge expansion to have a residual value of $600,000 at the end of its seven-year life.

Requirements

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

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