Using the ARR method to make capital investment decisions Refer to the Smith Valley Snow Park Lodge expansion project in Short Exercise S26- 4. Calculate the ARR. Round to two decimal places.

Data from Exercise S26-4

Consider how Smith Valley Snow Park Lodge could use capital budgeting to decide whether the $13,500,000 Snow Park Lodge expansion would be a good investment. Assume Smith Valley’s managers developed the following estimates concerning the expansion:

Assume that Smith Valley uses the straight-line depreciation method and expects the lodge expansion to have a residual value of $1,000,000 at the end of its 10-year life.

Number of additional skiers per day 117 skiers Average number of days per year that weather conditions allow skiing at Smith Valley 142 days Useful life of expansion (in years) 10 years Average cash spent by each skier per day $ 236 Average variable cost of serving each skier per day 76 Cost of expansion 13,500,000 Discount rate 10%