Consider how Flint Valley, a popular ski resort, could use capital budgeting to decide whether the $8.5 million Snow Park Lodge expansion would be a good investment.

Requirements

1. What is the project's NPV? Is the investment attractive? Why or why not? 2. Assume the expansion has no residual value. What is the project's NPV? Is the investment still attractive? Why or why not?

Assume that Flint Valley's managers developed the following estimates concerning a planned expansion to its Snow Park Lodge (all numbers assumed): Number of additional skiers per day 122 Average number of days per year that weather conditions allow skiing at Flint Valley 156 Useful life of expansion (in years) 8 Average cash spent by each skier per day 240 Average variable cost of serving each skier per day 132 Cost of expansion $ 8,500,000 Discount rate 10% Assume that Flint Valley uses the straight-line depreciation method and expects the lodge expansion to have a residual value of $850,000 at the end of its eight-year life. It has already calculated the average annual net cash inflow per year to be $2,055,456. Present Value of Annuity of $1 Periods Period 1 Period 2 Period 3 Period 4 Period 5 1% 0.990 1.970 2.941 3.902 4.853 2% 3% 4% 5% 0.980 0.971 0.962 0.952 1.942 1.9131.886 1.859 2.884 2.8292.775 2.723 3.808 3.717 3.630 3.546 4.713 4.580 4.452 4.329 6% 8% 10% 12% 0.943 0.926 0.909 0.893 1.833 1.783 1.736 1.690 2.673 2.577 2.487 2.402 3.465 3.312 3.170 3.037 4.212 3.993 3.791 3.605 14% 0.877 1.647 2.322 2.914 3.433 16% 0.862 1.605 2.246 2.798 3.274 18% 0.847 1.566 2.174 2.690 3.127 20% 0.833 1.528 2.106 2.589 2.991 3.685 4.039 4.344 4.607 4.833 3.498 3.812 4.078 4.303 4.494 3.326 3.605 3.837 4.031 4.192 Period 6 5.795 5.601 5.417 5.242 5.076 4.917 4.623 4.355 4.111 3.889 Period 7 6.728 6.472 6.230 6.002 5.786 5.5825.206 4.868 4.564 4.288 Period 8 7.652 7.325 7.0206.733 6.463 6.210 5.747 5.335 4.968 4.639 Period 9 8.566 8.162 7.786 7.435 7.108 6.802 6.247 5.759 5.328 4.946 Period 100 9.471 8.983 8.530 8.111 7.722 7.360 6.710 6.145 5.650 5.216 Period 11 10.368 9.787 9.253 8.760 8.306 7.887 7.139 6.495 5.938 5.453 Period 12. 11.255 10.575 9.954 9.3858.863 8.384 7.536 6.814 6.194 5.660 Period 13) 12.134 | 11.348 10.635 9.9869.394 8.853 7.904 7.103 6.424 5.842 Period 14 13.004 12.106 11.296 10.563 9.899 9.295 8.244 7.3676.628 6.002 Period 15 13.865 12.849 11.938 11.118 10.380 9.712 8.559 7.606 6.811 6.142 5.029 5.197 5.342 5.468 5.575 4.656 4.793 4.910 5.008 5.092 4.327 4.439 4.533 4.611 4.675 Period 20 18.046 16.351 14.877 13.590 12.462 11.470 9.818 8.514 7.469 Period 25 22.023 19.52317.413 15.622 14.094 12.783 10.675 9.077 7.843 Period 30 25.808 22.396 19.600 17.292 15.372 13.765 11.2589.4278.055 Period 40 32.835 27.355 23.115 19.793 17.159 15.046 11.925 9.779 8.244 6.623 6.873 7.003 7.105 5.929 6.097 6.177 6.233 5.353 5.467 5.517 5.548 4.870 4.948 4.979 4.997 Present Value of $1 16% Periods Period 1 Period 2 Period 3 Period 4 Period 5 1% 0.990 0.980 0.971 0.961 0.951 2% 0.980 0.961 0.942 0.924 0.906 3% 0.971 0.943 0.915 0.888 0.863 4% 0.962 0.925 0.889 0.855 0.822 5% 0.952 0.907 0.864 0.823 0.784 6% 0.943 0.890 0.840 0.792 0.747 8% 0.926 0.857 0.794 0.735 0.681 10% 0.909 0.826 0.751 0.683 0.621 12% 0.893 0.797 0.712 0.636 0.567 14% 0.877 0.769 0.675 0.592 0.519 0.862 0.743 0.641 0.552 0.476 18% 0.847 0.718 0.609 0.516 0.437 20% 0.833 0.694 0.579 0.482 0.402 Period 6 0.942 0.888 Period 7 0.933 0.871 Period 8 0.923 0.853 Period 9 0.914 0.837 Period 10 0.905 0.820 0.837 0.813 0.789 0.766 0.744 0.790 0.760 0.731 0.703 0.676 0.746 0.711 0.677 0.645 0.614 0.705 0.665 0.627 0.592 0.558 0.630 0.583 0.540 0.500 0.463 0.564 0.513 0.467 0.424 0.386 0.507 0.452 0.404 0.361 0.322 0.456 0.400 0.351 0.308 0.270 0.410 0.370 0.354 0.314 0.305 0.266 0.263 0.225 0.227 0.191 0.335 0.279 0.233 0.194 0.162 Period 11 0.896 0.804 Period 120.887 0.788 Period 13 0.879 0.773 Period 14 0.870 0.758 Period 15 0.861 0.743 0.722 0.650 0.701 0.625 0.681 0.601 0.661 0.577 0.642 0.555 0.585 0.557 0.530 0.505 0.481 0.527 0.497 0.469 0.442 0.417 0.429 0.397 0.368 0.340 0.315 0.350 0.319 0.290 0.263 0.239 0.287 0.257 0.229 0.205 0.183 0.237 0.208 0.182 0.160 0.140 0.195 0.168 0.145 0.125 0.108 0.162 0.137 0.116 0.099 0.084 0.135 0.112 0.093 0.078 0.065 Period 200.820 Period 25 0.780 Period 30 0.742 Period 40 0.672 0.673 0.610 0.552 0.453 0.554 0.478 0.412 0.307 0.456 0.375 0.308 0.208 0.377 0.295 0.231 0.142 0.312 0.233 0.174 0.097 0.215 0.146 0.099 0.046 0.149 0.092 0.057 0.022 0.104 0.059 0.033 0.011 0.073 0.038 0.020 0.005 0.051 0.024 0.012 0.003 0.037 0.016 0.007 0.001 0.026 0.010 0.004 0.001 Future Value of Annuity of $1 Periods Period 1 Period 2 Period 3 Period 4 Period 5 1% 1.000 2.010 3.030 4.060 5.101 2% 1.000 2.020 3.060 4.122 5.204 3% 1.000 2.030 3.091 4.184 5.309 4% 1.000 2.040 3.122 4.246 5.416 5% 1.000 2.050 3.153 4.310 5.526 6% 1.000 2.060 3.184 4.375 5.637 8% 1.000 2.080 3.246 4.506 5.867 10% 1.000 2.100 3.310 4.641 6.105 12% 1.000 2.120 3.374 4.779 6.353 14% 1.000 2.140 3.440 4.921 6.610 16% 1.000 2.160 3.506 5.066 6.877 18% 1.000 2.180 3.572 5.215 7.154 20% 1.000 2.200 3.640 5.368 7.442 8.536 10.730 13.233 16.085 19.337 8.977 11.414 14.240 17.519 21.321 9.442 12.142 15.327 19.086 23.521 9.930 12.916 16.499 20.799 25.959 Period 6 6.152 6.308 6.468 6.633 6.802 6.975 7.336 7.716 8.115 Period 7 7.214 7.434 7.662 7.898 8.142 8.394 8.923 9.487 10.089 Period 8 8.286 8.583 8.892 9.214 9.549 9.897 10.637 11.436 12.300 Period 9 9.369 9.755 10.159 10.583 11.027 11.491 12.488 13.579 14.776 Period 10 10.462 10.950 11.464 12.006 12.578 13.181 | 14.487 15.937 17.549 Period 11 11.567 12. 169 12.808 13.486 14.207 14.972 16.645 18.531 20.655 Period 12 12.683 13.412 14.192 15.026 15.917 16.870 18.977 21.384 24.133 Period 13 13.809 14.680 15.618 16.627 17.713 18.882 21.495 24.523 | 28.029 Period 14 14.94715.974 17.086 18.292 19.599 | 21.015 | 24.215 27.975 32.393 Period 15 16.09717.29318.599 20.024 21.579 23.276 27.152 31.772 37.280 23.045 27.271 32.089 37.581 43.842 25.733 30.850 36.786 43.672 51.660 28.755 34.931 42.219 50.818 60.965 32.150 39.581 48.497 59.196 72.035 Period 20 22.019 24.29726.870 29.778 33.066 36.786 45.762 57.275 72.052 91.025 115.380 146.628 186.688 Period 25 28.243 32.030 36.459 41.646 47.727 54.865 73.106 98.347 133.334 181.871 249.214 342.603 471.981 Period 30 34.785 40.568 47.575 56.085 | 66.439 79.058 113.283 164.494 241.333 356.787 530.312 790.948 1,181.882 Period 40 48.886 60.402 75.401 95.026 120.800 154.762259.057 442.593 767.091 1,342.025 2,360.757 4,163.213 7,343.858 Future Value of $1 16% Periods Period 1 Period 2 Period 3 Period 4 Period 5 1% 1.010 1.020 1.030 1.041 1.051 2% 1.020 1.040 1.061 1.082 1.104 3% 1.030 1.061 1.093 1.126 1.159 4% 1.040 1.082 1.125 1.170 1.217 5% 1.050 1.103 1.158 1.216 1.276 6% 1.060 1.124 1.191 1.262 1.338 8% 1.080 1.166 1.260 1.360 1.469 10% 1.100 1.210 1.331 1.464 1.611 12% 1.120 1.254 1.405 1.574 1.762 14% 1.140 1.300 1.482 1.689 1.925 1.160 1.346 1.561 1.811 2.100 18% 1.180 1.392 1.643 1.939 2.288 20% 1.200 1.440 1.728 2.074 2.488 Period 6 Period 7 Period 8 Period 9 Period 10 1.062 1.072 1.083 1.094 1.105 1.126 1.149 1.172 1.195 1.219 1.194 1.230 1.267 1.305 1.344 1.265 1.316 1.369 1.423 1.480 1.340 1.407 1.477 1.551 1.629 1.419 1.504 1.594 1.689 1.791 1.587 1.714 1.851 1.999 2.159 1.772 1.949 2.144 2.358 2.594 1.974 2.211 2.476 2.773 3.106 2.195 2.502 2.853 3.252 3.707 2.436 2.826 3.278 3.803 4.411 2.700 3.185 3.759 4.435 5.234 2.986 3.583 4.300 5.160 6.192 Period 11 Period 12 Period 13 Period 14 Period 15 1.116 1.127 1.138 1.149 1.161 1.243 1.268 1.294 1.319 1.346 1.384 1.426 1.469 1.513 1.558 1.539 1.601 1.665 1.732 1.801 1.710 1.796 1.886 1.980 2.079 1.898 2.012 2.133 2.261 2.397 2.332 2.518 2.720 2.937 3.172 2.853 3.138 3.452 3.797 4.177 3.479 3.896 4.363 4.887 5.474 4.226 4.818 5.492 6.261 7.138 5.117 5.936 6.886 7.988 9.266 6.176 7.288 8.599 10.147 11.974 7.430 8.916 10.699 12.839 15.407 Period 20 Period 25 Period 30 Period 40 1.220 1.282 1.348 1.489 1.486 1.641 1.811 2.208 1.806 2.094 2.427 3.262 2.191 2.666 3.243 4.801 2.653 3.386 4.322 7.040 3.207 4.661 6.727 9.646 13.743 19.461 27.393 38.338 4.292 6.848 10.83517.000 26.462 40.874 62.669 95.396 5.743 10.063 | 17.449 29.960 50.950 85.850 143.371 237.376 10.286 21.725 45.259 93.051 188.884 378.721 750.378|1,469.772