Question

Consider how Flint Valley?, a popular ski? resort, could use capital budgeting to decide whether the $ 9 million River Park Lodge expansion would be a good investment. LOADING...?(Click the icon to view the expansion? estimates.) Assume that Flint Valley uses the? straight-line depreciation method and expects the lodge expansion to have a residual value of $ 500 comma 000 at the end of its nine?-year life. Read the requirements LOADING.... 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 x = net cash inflow x = Requirement 2. Compute the average annual operating income from the expansion. First enter the? formula, then compute the average annual operating income from the expansion.? (Round your answer to the nearest? dollar.) Average annual operating Average annual net cash inflow – ? = income from asset – = Requirement 3. Compute the payback period. First enter the? formula, then compute the payback period. ?(Enter amounts in? dollars, not millions. Round your answer to two decimal? places.) Initial investment / ? = Payback period / = years Requirement 4. Compute the ARR. First enter the? formula, then compute the accounting rate of return. ?(Enter amounts in? dollars, not millions. Enter your answer as a percent rounded to two decimal? places.) Accounting Average annual operating income from asset / ? = rate of return / = % Assume that Flint Valley?'s managers developed the following estimates concerning a planned expansion to its River Park Lodge? (all numbers? assumed): Number of additional skiers per day . . . . . . . . . . . . . . . 122 Average number of days per year that weather conditions allow skiing at Flint Valley . . . . . . . . . 162 Useful life of expansion (in years) . . . . . . . . . . . . . . . . . . . 9 Average cash spent by each skier per day . . . . . . . . . . . $245 Average variable cost of serving each skier per day . . . . $142 Cost of expansion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $9,000,000 Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12%

Answer 1

1

Average annual net cash inflow=122*162*(245-142)=$2035692

2

Average annual operating income=Average annual net cashinflow-Depreciation

Depreciation=(9000000-500000)/9=944445

Average annual operating income=2035692-944445=1091247

3

Payback period=Initial investment/Expected annual net cash inflow=9000000/2035692=4.42 years

4

Acounting rate of return=Average annual operating income/Average amount invested

Average amount invested=(Book value of investment at the beginning+Book value of investments at the end)/2

Book value of investment at the beginning=Initial investment=9000000

Book value of investment at the end=Residual value=500000

Average amount invested=(9000000+500000)/2=4750000

Acounting rate of return=1091247/4750000=0.2297=22.97%