Consider how White Valley Snow Park Lodge could use capital budgeting to decide

Question

Consider how White Valley Snow Park Lodge could use capital budgeting to decide whether the $12,500,000 Brook Park Lodge expansion would be a good investment. Assume White Valley’s managers developed the following estimates concerning the expansion:

Compute the average annual net cash inflow from the expansion.

Average cash receive from each skier per day 159

Average variable cost of serving each skier per day (85)

Average net cash inflow per skier per day 74

Number of additional skiers per day x 120

Average net cash inflow per day 8,880

Number of ski days per year x 149

Average Annual net cash inflow per year 1,323,120

Compute the average annual operating income from the expansion.

Average Annual net cash inflow per year – depreciation

1,323,120 – 991,666.6667 or 991,667= 331,453

Requirement

What is the project’s NPV? Is the investment attractive? Why?

120 Number of additional skiers per day . . . . . . Average number of days per year that weather 149 12 159 85 conditions allow skiing at White Valley . Average cash spent by each skier per day $ Average cash spent by each skier per day .. . . . . Average variable cost of serving each skier per day 12% Discount rate

Explanation / Answer

Solution:

NPV = -Initial Investment + Cash flow (PVIFA @ I, n)

NPV = -12,500,000 + 331,453 (PVIFA @ 12%, 12)

NPV = -12,500,000 + 331,453 [(1.12^12 - 1) / (0.12*1.12^12)]

NPV = -12,500,000 + 331,453 (6.19437)

NPV = -12,500,000 + 2,053,143.92

NPV = -$10,446,856.08

Since NPV is negative, investment is not attractive.

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