Consider how Hope Valley, a popular ski resort, could use capital budgeting to decide whether the $10 million Blizzard Park Lodge expansion would be a good investment.

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. Compute the average annual net cash inflow from the expansion.

2. Compute the average annual operating income from the expansion.

3. Compute the payback period.

4. Compute the ARR.

Consider how Hope Valley a popular ski resort could use



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