Answered: Number of additional skiers per day…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

Using the payback and accounting rate of return methods to make capital investment decisions

Consider how Hunter Valley Snow Park Lodge could use capital budgeting to decide whether the $11,000,000 Snow Park Lodge expansion would be a good investment. Assume Hunter Valley’s managers developed the following estimates concerning the expansion:

Assume that Hunter Valley uses the straight-line depreciation method and expects the lodge expansion to have a residual value of $600,000 at the end of its seven-year life.

Requirements

Compute the average annual net cash inflow from the expansion.
Compute the average annual operating income from the expansion.

Number of additional skiers per day
Average number of days per year that weather conditions
allow skiing at Hunter Valley
Useful life of expansion (in years)
Average cash spent by each skier per day
Average variable :ost of serving each skier per day
Cost of expansion
121 skiers
142 days
7 years
241
83
11,000,000
10%
Discount rate

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