Refer to the Hunter Valley Snow Park Lodge expansion project in Short Exercise S26-4 and your calculations in Short Exercises S26-5 and S26-6. Assume the expansion has zero residual value.

Refer to Short Exercise S26-5 and S26-6,

Consider how Hunter Valley Snow Park Lodge could use capital budgeting to decide whether the $11,000,000 Snow Park Lodge expansion would be a good investment. Assume Hunter Valley's managers developed the following estimates concerning the expansion:

Number of additional skiers per day ................................................ 121 skiers

Average number of days per year that weather conditions

allow skiing at Hunter Valley ....................................................... 142 days

Useful life of expansion (in years) ................................................... 7 years

Average cash spent by each skier per day ........................................... $ 241

Average variable cost of serving each skier per day ................................... 83

Cost of expansion ................................................................ 11,000,000

Discount rate .............................................................................. 10%

Assume that Hunter Valley uses the straight-line depreciation method and expects the lodge expansion to have a residual value of $600,000 at the end of its seven-year life.

Requirements

1. Will the payback change? Explain your answer. Recalculate the payback if it changes. Round to one decimal place.

2. Will the project's ARR change? Explain your answer. Recalculate ARR if it changes. Round to two decimal places.

3. Assume Hunter Valley screens its potential capital investments using the following decision criteria:

Maximum payback period .................................... 5.0 years

Minimum accounting rate of return ........................... 18.00%

Will Hunter Valley consider this project further or reject it?