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Consider how Smith Valley Snow Park Lodge

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S21-2 Using the payback period and rate of return methods to make capital investment decisions [10 min]

Consider how Smith Valley Snow Park Lodge could use capital budgeting to decide whether the $13,500,000 Snow Park Lodge expansion would be a good investment.
Assume Smith Valley’s managers developed the following estimates concerning the expansion:

Number of additional skiers per day . . . . . . . . . . . . .117
Average number of days per year that weather
conditions allow skiing at Smith Valley . . . . . . .142
Useful life of expansion (in years) . . . . . . . . . . . . . . . .10
Average cash spent by each skier per day . . . . . . . . . .236
Average variable cost of serving each skier per day . . .76
Cost of expansion . . . . . . . . . . . . . . . . . . . . . . . . . . .13,500,000
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10%

Assume that Smith Valley uses the straight-line depreciation method and expects the
lodge expansion to have a residual value of $1,000,000 at the end of its 10-year life.
Requirements
1. Compute the average annual net cash inflow from the expansion.
2. Compute the average annual operating income from the expansion.
Note: Short Exercise 21-2 must be completed before attempting Short Exercise 21-3.

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