Question
Consider how Smith Valley Waterfall Park Lodge could use capital budgeting to decide whether the $11,500,000 Waterfall Park Lodge expansion would be a good investment.
Consider how Smith Valley Waterfall Park Lodge could use capital budgeting to decide whether the $11,500,000 Waterfall Park Lodge expansion would be a good investment. Assume Smith
Valley's managers developed the following estimates concerning the expansion:
Requirement 1. 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 inflow | = | Payback |
The payback will | continue to | be | 4.3 | years. |
The residual value does not affect the computation of the payback and the payback method does not consider cash flows that occur after the payback period.
Requirement 2. Will the project's ARR change? Explain your answer. Recalculate ARR if it changes. Round to two decimal places.
Select the formula to calculate the ARR.
Average annual operating income | / | Average amount invested | = | ARR |
The ARR will | continue to | be | %. |
The ARR
changes
stays the same
when the residual value changes to zero. The average annual operating income (numerator) will
be higher
be lower
stay the same
because the depreciation expense is
higher
lower
the same
. Additionally, the average investment (denominator) is
higher
lower
the same
when the asset does not have a residual value.
Consider how Smith Valley Waterfal Park Lodige could use capital bulgesting to decide whether the S11,500,000 Waterfall Park Lodge expansion would be a good investment. Assund Smith Valley's managers developed the following estimates concerning the expansion: Click the con la view the elim. (Click the icon to view additional information) i Read the requirements Data Table Requirement 1. Will the payback change? Explain your answer. Recalculate the payback if it changes. Round to one decimal place. 118 skiers Select the formula lo calculate the payback period, Amount invested Expected annual net cash inflow Payback 144 days The payback will continue to be 43 years Number of additional skiars par day Average number of days per year that weather conditions allow skiing at Smith Valley Useful life of expansion in years) Average cash spent by cach skier per day Average variable cost of serving each skier per day Cost of expansion Discount rate The residual value does not affect the computation of the payback and the payback method does not consider cash flows that occur after the payback period. 10 years 240 B2 Requirement 2. Wil the projecte ARR change? Explain your answer. Recalculate ARR if it changes. Round to two decimal plece. Select the formula to calculate the ARR. 11,500,000 8% Average annual operaling income Average aunt invested ARR Print Done The ARR will The when the residual value changes to zero. The average annual aperating income (numerator will because the depreciation expense is Additionally, the average investment (denominator) is when the assas nat The ARR have a residual value More into Under the assumption that the expansion would have a residual value al $1.000.000. The managers calculated the payback period to be 4.3 years. The ARR to be 28.18%, the average annual operating income to be $1,834,736, the average amount invested to be $2,250,000, and the average annual relcast influw to be $2,884,738 Assume that Smith Valley uses the straight-ine depreciation method and now expects the lodge expansion to have zero residual value at the end of its ten-year lifeStep by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started