Consider how Stenback 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 Stenback Valley’s managers developed the following estimates concerning the expansion:
Number of additional skiers per day.............................................. 116 skiers
Average number of days per year that weather conditions
allow skiing at Stenback Valley.................................................... 143 days
Useful life of expansion (in years)................................................. 8 years
Average cash spent by each skier per day..................................... $ 244
Average variable cost of serving each skier per day..................... 82
Cost of expansion..........................................................................11,000,000
Discount rate................................................................................. 12%
Assume that Stenback 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 eight-year life.
Requirements
1. Compute the average annual net cash inflow from the expansion.
2. Compute the average annual operating income from the expansion.