Consider how Frost Valley

FrostValley, a popular skiresort, could use capital budgeting to decide whether the $ 8.5

$8.5 million Spring

Spring Park Lodge expansion would be a good investment.

What is theproject's NPV? Is the investmentattractive? Why or whynot?

Calculate the net present value of the expansion.

Assume that Frost Valley

FrostValley uses thestraight-line depreciation method and expects the lodge expansion to have a residual value of

$1,000,000 at the end of its ten

ten-year life. It has already calculated the average annual net cash inflow per year to be

$1,951,600.

Assume that Frost Valley

FrostValley's managers developed the following estimates concerning a planned expansion to its Spring

Spring Park Lodge(all numbersassumed):

Number of additional skiers per day

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

119

Average number of days per year that weather

conditions allow skiing at Frost Valley

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

164

Useful life of expansion (in years)

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

10

Average cash spent by each skier per day

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

240

Average variable cost of serving each skier per day

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

140

Cost of expansion

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

8,500,000

Discount rate

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

10%