Question

Consider how Hunter Valley, a popular ski resort, could use capital budgeting to decide whether the $9 million River Park Lodge expansion would be a good investment.
Assume that Hunter Valley uses the straight-line depreciation method and expects the lodge expansion to have a
Assume that Hunter 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%
residual value of $500,000 at the end of its nine-year life. Requirement 1. Compute the average annual net cash inflow from the expansion. 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? 3. Compute the payback period. 4. Compute the ARR.

Answer 1

Answer:

1.$2,035,692

2.$1,091,248

3.8.24 years

4.22.97%

Explanation:

Hunter Valley

1. Computation for the average annual net cash inflow from the expansion.

Formula for Average annual net cash inflow from operation

= Numbers of skiers day * Contribution margin per skier

(122*162) * ($245 - $142)

=19,764*$103

= $2,035,692

2.Computation for the average annual operating income from the expansion

Formula for Average annual operating income from expansion

= Annual cash inflow - Depreciation

= $2,035,692 - ($9,000,000 - $500,000) / 9

= $2,035,692-$8,500,000/9

$1,091,248

3.Computation for the Payback period

Payback period = Initial investment / Annual cash inflows

= $9,000,000 / $1,091,248

= 8.24 years

4.Computation for the ARR

ARR = Average annual income / Average investment

Hence:

Average investment = (Cost +Residual value) / 2

= ($9,000,000 +$500,000) / 2

=$9,500,000/2

= $4,750,000

ARR = $1,091,248 / $4,750,000

=0.2297×100

= 22.97%