Consider how Kyler Valley Spring Park Lodge could use capital budgeting to decide whether the $13,000,000 Spring Park Lodge expansion would be a good investment. Assume Kyler

Valley's managers developed the following estimates concerning the expansion. Under the assumption that the expansion would have a residual value of $950,000, the managers calculated the payback period to be 4.4 years, the ARR to be 20.89%,the average annual operating income to be $1,456,850, the average amount invested to be $6,975,000,and the average annual net cash inflow to be $2,963,100.

Assume that Kyler Valley uses the straight-line depreciation method and now expects the lodge expansion to have zero residual value at the end of its eight-year life.

Will the payback change? Explain your answer. Recalculate the payback if it changes. Round to one decimal place.

Select the formula to calculate the payback period. Amount invested/Expected annual net cash flow = payback

The payback will (select one of the two) continue to or now be _________ years.

The residual value (select one of the two) affects or does not affect the computation of the payback and the payback method, (select one of the two) does not consider or consider

cash flows that occur after the payback period.

Fill in the blanks. See above

The payback will ___________be___________. The residual value ______the computation of the payback of the payback and the payback method ________cash flows that occur after the payback period.

More DATA

Number of additional skiers per day	119 skiers
Average number of days per year that weather conditions
allow skiing at Kyler Valley	150 days
Useful life of expansion (in years)	8 years
Average cash spent by each skier per day	$244
Average variable cost of serving each skier per day	78
Cost of expansion	13,000,000
Discount rate	12%

Number of additional skiers per day

119 skiers