Refer to the Hope Valley data in E12-51B. Assume that Hope uses the straight-line depreciation method and expects the lodge expansion to have no residual value at the end of its eight-year life. The company has already calculated the average annual net cash inflow per year to be $1,375,000 and the NPV of the expansion to be $1,775,400. What is the project's IRR? Is the investment attractive? Why?
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%