Refer to the Hope Valley data in E12-51B. Now assume the expansion has zero residual value.
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. Will the payback period change? Explain and recalculate if necessary.
2. Will the project's ARR change? Explain and recalculate if necessary.
3. Assume Hope Valley screens its potential capital investments using the following decision criteria: maximum payback period of five years, minimum accounting rate of return of 10%. Will Hope Valley consider this project further or reject it?