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:
Number of additional skiers per day . . . . . . . . . . . . . 117
Average number of days per year that weather
conditions allow skiing at Smith Valley . . . . . . . 142
Useful life of expansion (in years) . . . . . . . . . . . . . . . . 10
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%
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.
Requirements
1. Compute the average annual net cash inflow from the expansion.
2. Compute the average annual operating income from the expansion.