Consider how Soar Mountain, a popular ski resort, could use capital budgeting to decide whether the $9.5 million State Park Lodge expansion would be a good investment.
Assume that Soar Mountain's managers developed the following estimates concerning a planned expansion of its State Park Lodge (all numbers assumed):
Number of additional skiers per day ............................................................118
Average number of days per year that weather conditions allow
skiing at Soar Mountain ...............................................................................164
Useful life of expansion (in years) ................................................................ 10
Average cash spent by each skier per day ............................................... $ 238
Average variable cost of serving each skier per day ............................... $ 134
Cost of expansion ............................................................................$9,500,000
Discount rate ............................................................................................ 12%
Assume that Soar Mountain uses the straight-line depreciation method and expects the lodge expansion to have a residual value of $700,000 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.
3. Compute the payback period.
4. Compute the ARR.