Consider how Clare Valley, a popular ski resort, could use capital budgeting to decide whether the $8 million Stream Park Lodge expansion would be a good investment. Assume that Clare 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 ten-year life. Requirement:
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.
Assume that Clare Valley's managers developed the following estimates concerning a planned expansion to its Blizzard Park Lodge (all numbers assumed):
Number of additional skiers per day $117
Average number of days per year that weather
conditions allow skiing at Clare Valley $164
Useful life of expansion (in years) 9
Average cash spent by each skier per day 243
Average variable cost of serving each skier per day $134
Cost of expansion $8,500,000
Discount rate 12%