Refer to the Star Valley Data Set in E12- 50B. Now assume the expansion has zero residual value.

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 Star Valley screens its potential capital investments using the following ­decision criteria: maximum payback period of six years, minimum accounting rate of ­return of 10%. Will Star Valley consider this project further or reject it?

Star Valley Data Set

Number of additional skiers per day.............................................................................................120

Average number of days per year that weather conditions allow skiing at Star Valley......... 163

Useful life of expansion (in years)....................................................................................................10

Average cash spent by each skier per day................................................................................ $ 243

Average variable cost of serving each skier per day................................................................ $ 142

Cost of expansion.............................................................................................................. $ 9,000,000

Discount rate................................................................................................................................... 14%

Assume that Star Valley uses the straight- line depreciation method and expects the lodge expansion to have a residual value of $ 900,000 at the end of its 10- year life.