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

Answer 1

Solution 1:

Average annual net cash inflow from operation = Nos of skiers day * Contribution margin per skier

(122*159) * ($239 - $138) = $1,959,198

Solution 2:

Average annual operating income from expansion = Annual cash inflow - Depreciation

= $1,959,198 - ($8,500,000 - $700,000) / 8= $984,198

Solution  3:

Payback period = Initial investment / Annual cash inflows = $8,500,000 / $1,959,198 = 4.34 years

Solution 4:

ARR = Average annual income / Average investment

Average investment = (Cost +Residual value) / 2 = ($8,500,000 / $700,000) / 2 = $4,600,000

ARR = $984,198 / $4,600,000 = 21.40%