Refer to the Bear Valley Data

Set in E12- 32A. Assume that the expansion has zero ­residual value.

Requirements

1. Will the payback period change? Explain and recalculate if necessary.

2. Will the project’s ARR change? Explain and recalculate if necessary.

3. Assume that Bear Valley screens its potential capital investments using the following decision criteria: Maximum payback period = 6 years and minimum accounting rate of return = 10%. Will Bear Valley consider this project further or reject it?

In E12- 32A

Assume that Bear Valley’s managers developed the following estimates concerning a planned expansion to its Autumn Park Lodge (all numbers assumed):

Number of additional skiers per day......................................................... 117

Average number of days per year that weather conditions allow

skiing at Bear Valley..................................................................................... 162

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

Average cash spent by each skier per day............................................. $ 245

Average variable cost of serving each skier per day............................. $ 140

Cost of expansion............................................................................ $ 8,500,000

Discount rate................................................................................................. 10%

Assume that Autumn Valley uses the straight- line depreciation method and expects the lodge expansion to have a residual value of $ 700,000 at the end of its ten- year life.