Consider how Star Valley, a popular ski resort, could use capital budgeting to decide whether the $ 9 million River Park Lodge expansion would be a good investment.

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.

Star Valley Data Set

Number of additional skiers per day.............................................................................................120

Average number of days per year that weather conditions allow skiing at Star Valley......... 163

Useful life of expansion (in years)....................................................................................................10

Average cash spent by each skier per day................................................................................ $ 243

Average variable cost of serving each skier per day................................................................ $ 142

Cost of expansion............................................................................................................... $ 9,000,000

Discount rate................................................................................................................................... 14%

Assume that Star Valley uses the straight- line depreciation method and expects the lodge expansion to have a residual value of $ 900,000 at the end of its 10- year life.