Refer to Short Exercise S26-4. Continue to assume that the expansion has no residual value. What is the project's IRR? Is the investment attractive? Why or why not?
Refer to Short Exercise S26-4,
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.