Consider how Juda Valley Spring Park Lodge could use capital budgeting to decide

Question

Consider how Juda Valley Spring Park Lodge could use capital budgeting to decide whether the $13,000,000 Spring Park Lodge expansion would be a good investment. Assume Juda Valley's managers developed the following estimates concerning the (Click the icon to view the estimates.) Assume that Juda Valley uses the straight-ine depreciation method and expects the lodge expansion to have a residual value of 1,000,000 at the end of its eight-year life. The average annual operating income from the expansion is $1,386,516 and the depreciation has been calculated as $1,500,000 Caiculate the ARR.Round to two decimal places. Average annual operating IncomeAverage amount InvestedARR Data Table Number of additional skiers per day Average number of days per year that weather conditions 118 skiers allow sking at Juda Valley Useful life of expansion (in years) Average cash spent by each skier per day Average variable cost of serving each skier per day Cost of expansion Discount rate 151 days 8 years S246 84 Chod 13,000,000q question 1256 20 F6 2 3 4 5 6 Q WE

Explanation / Answer

Annual Depreciation under SLM: Original Cost of Expansion 13,000,000 Estimated Life 8 years Salvage value at the end of life 1,000,000 Annual Depreciation = Cost-Salvage value /Estimated life (13000,000-1000,000)/8 = $ 1500,000 Revenue charged per Skier per day 246 Less: Variable cost per skier per day 84 Contribution per skier per day 162 Number of Additional skiers per day 118 Contribution per day(162*118) 19116 Number of Days allowed for Skiing 151 Total Contribution per year(19116*151) 2886516 Less: Annual Depreciation 1,500,000 Annual Operating Income 1,386,516 Average Annual Operating Income / Average Amount Invested = ARR 1386,516 / 13000,000 = 10.67%

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