Consider how Cherry Valley?, a popular ski? resort, could use capital budgeting
ID: 2433044 • Letter: C
Question
Consider how Cherry Valley?, a popular ski? resort, could use capital budgeting to decide whether the $8.5 million Spring Park Lodge expansion would be a good investment.
Assume that Cherry Valley?'s managers developed the following estimates concerning a planned expansion to its Spring Park Lodge? (all numbers? assumed):
Number of additional skiers per day. . . . . . . . . . . . . . .
122
Average number of days per year that weather
conditions allow skiing at Cherry Valley. . . . . . .
159
Useful life of expansion (in years). . . . . . . . . . . . . . . .
8
Average cash spent by each skier per day. . . . . . . . .
$239
Average variable cost of serving each skier per day. . .
$138
Cost of expansion. . . . . . . . . . . . . . . . . . . . . . . . . . .
$8,500,000
Discount rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10%
Assume that Cherry ValleyCherry Valley uses the? straight-line depreciation method and expects the lodge expansion to have a residual value of $700,000 at the end of its eighteight?-year life.
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.
Requirement 1. Compute the average annual net cash inflow from the expansion. First enter the? formula, then compute the average annual net cash inflow from the expansion. ?(Round your answer to the nearest? dollar.) Average annual Number of ski days per year x Average net cash inflow per day = net cash inflow
Number of additional skiers per day. . . . . . . . . . . . . . .
122
Average number of days per year that weather
conditions allow skiing at Cherry Valley. . . . . . .
159
Useful life of expansion (in years). . . . . . . . . . . . . . . .
8
Average cash spent by each skier per day. . . . . . . . .
$239
Average variable cost of serving each skier per day. . .
$138
Cost of expansion. . . . . . . . . . . . . . . . . . . . . . . . . . .
$8,500,000
Discount rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10%
Explanation / Answer
Answer:
1)
Compute the average annual net cash inflow from the expansion
Average cash received from each skier per day
239
Average variable cost of serving each skier per day
138
Average net cash inflow per skier per day
101
Number of additional skiers per day
x 122
Average net cash inflow per day
12322
Number of ski days per year
x 142
Average annual net cash inflow per year
1959198
2)
Compute the average annual operating income from the expansion
= Average annual net cash inflow ? depreciation
= 1959198? $(8,500,000-700,000)/8
= 1959198-975000
=984,198
3)
Compute the payback period for the expansion project.
Payback period = Amount invested / Expected annual net cash inflow
= $8,500,000 / $ 984198
= 4.34 years (Rounded to one decimal place)
4)
Accounting rate of return
=Average annual operating income from investment /Average amount invested
=984,198 / (8,500,000+700,000)/2
=984,198 / 4,600,000
=21.40%
Average cash received from each skier per day
239
Average variable cost of serving each skier per day
138
Average net cash inflow per skier per day
101
Number of additional skiers per day
x 122
Average net cash inflow per day
12322
Number of ski days per year
x 142
Average annual net cash inflow per year
1959198
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.