Refer to the Cherry Valley Data Set. Now assume the expansion has zero residual value.
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. Will the payback period change? Explain and recalculate if necessary.
2. Will the project’s ARR change? Explain and recalculate if necessary.
3. Assume Cherry Valley screens its potential capital investments using the following decision criteria: maximum payback period of six years, minimum accounting rate of return of 8%. Will Cherry Valley consider this project further or reject it?