Refer to the Cherry Valley Data Set. Assume that Cherry Valley uses the straight-line depreciation method and expects the lodge expansion to have a residual value of $950,000 at the end of its nine-year life. It has already calculated the average annual net cash inflow per year to be $2,174,040.
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. What is the project’s NPV? Is the investment attractive? Why or why not?
2. Assume the expansion has no residual value. What is the project’s NPV? Is the investment still attractive? Why or why not?