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

Assume that Frost Valley's managers developed the following estimates concerning a planned expansion to its Waterfall Park Lodge (all numbers assumed):

Number of additional skiers per day . . . . . . . . . . . . . 117

Average number of days per year that weather conditions allow skiing at Frost Valley . . . . . . . . . . . 157

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 . $135

Cost of expansion . . . . . . . . . . . . . . . . . . . . . . . . . . $8,500,000

Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14%

Assume that Frost Valley uses the straight-line depreciation method and expects the lodge expansion to have a residual value of $800,000 at the end of its ten-year life. It has already calculated the average annual net cash inflow per year to be $1,855,269.

ANSWER: 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?