Refer to the Cherry Valley Data Set and assume the expansion has a residual value of $950,000 at the end of nine years. Consider how Cherry Valley, a popular ski resort, could use capital budgeting to decide whether the $10-million Brook Park Lodge expansion would be a good investment.
Cherry Valley Data Set.
Assume that Cherry Valley’s managers developed the following estimates concerning the expansion (all numbers assumed):
Number of additional skiers per day.................................................. 122
Average number of days per year that weather
conditions allow skiing at Cherry Valley ..................................... 162
Useful life of expansion (in years)....................................................... 9
Average cash spent by each skier per day........................................... $ 245
Average variable cost of serving each skier per day............................ $ 135
Cost of expansion .............................................................................. $10,000,000
Discount rate...................................................................................... 10%
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.