Chapter 26, Problem 4SE

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

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