Refer to the Soar Mountain Data Set in E12-51B.
Assume that Soar Mountain's managers developed the following estimates concerning a planned expansion of its State Park Lodge (all numbers assumed):
Number of additional skiers per day ............................................................118
Average number of days per year that weather conditions allow
skiing at Soar Mountain ...............................................................................164
Useful life of expansion (in years) ................................................................ 10
Average cash spent by each skier per day ............................................... $ 238
Average variable cost of serving each skier per day ............................... $ 134
Cost of expansion ............................................................................$9,500,000
Discount rate ............................................................................................ 12%
Assume that Soar Mountain uses the straight-line depreciation method and expects the lodge expansion to have a residual value of $700,000 at the end of its 10-year life.
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?