Refer to the Hope Valley data in E12-51B. Assume that Hope Valley uses the straight-line depreciation method and expects the lodge expansion to have a residual value of $1,100,000 at the end of its eight-year life. It has already calculated the average annual net cash inflow per year to be $1,375,000.
Refer to Hope Valley Data Set
Assume that Hope Valley's managers developed the following estimates concerning a planned expansion of its Blizzard Park Lodge (all numbers assumed):
Number of additional skiers per day............................................................................. 110
Average number of days per year that weather
conditions allow skiing at Hope Valley .......................................................... 125
Useful life of expansion (in years) ................................................................................... 8
Average cash spent by each skier per day ................................................................. $ 230
Average variable cost of serving each skier per day ................................................. $ 130
Cost of expansion ............................................................................................. $5,500,000
Discount rate ............................................................................................................... 12%
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?