Question

Homework: CH12 Score: 0 of 4 pts E12-33A (book/static) 7 of 8 (6 complete) HW Score: 62.11 %, 18.63 o E Question Hel Consider how Wolf Valley, a popular ski resort could use capital budgeting to decide whether the $8 million Brook Park Lodge expansion would be a good investment. EEE (Click the lcon to vilew the expanslon estlmates.) (Click the icon to view the present value annuity factor table.) (Click the icon to view the future value annuity factor table.) (Click the icon to view the future value factor table.) Read the requirements (Click the icon to view the present value factor table.) i Data Table Assume that Walf Valley's managers developed the following estimates conoeming a planned expansion to its Brook Park Lodge (all numbens assumed): Requirement 1. What is the projects NPV? Is the investment attractive? Why or why not? Calculate the net present value of the expansion. (Round your answer to the nearest whole dollar. Use parentheses or a minus sign for a negative nat Net present value of expansion $ 125 Number of additional skiers per day Average number of days per year that weather Wolf Valley 160 conditions allow skiing at Useful life of expansion in years). Average cash spent by each skier per day e variable cost of serving 240 142 Averag each skier per day $8,000,000 Cost of expansion Discount rate Assume that Wolf Valley uses the straight-ine depreciation method a expects the lodge expanslon to have a residual value of $1,000,000 at the end of its eight-year life. It has already calculated the average annual net cash infow per year to be $1,960,000. 12% | PrintDone Enter any number in the edit fields and then click Check Answer

Answer 1

solution 1:

Average annual net cash inflow from operation = Nos of skiers day * Contribution margin per skier

(125*160) * ($240 - $142) = $1,960,000

Computation of NPV - Wolf Valley
Particulars	Period	Amount	PV factor at 12%	Present Value
Cash outflows:
Initial investment	0	$8,000,000.00	1	$8,000,000
Present Value of Cash outflows (A)				$8,000,000
Cash Inflows
Annual cash inflows	1-8	$1,960,000.00	4.96764	$9,736,574
Residual value	8	$100,000.00	0.40388	$40,388
Present Value of Cash Inflows (B)				$9,776,962
Net Present Value (NPV) (B-A)				$1,776,962

As NPV is positive, therefore investment is attractive.