Maggie's Resorts was wondering how to use capital budgeting to decide if their $7,901,000 expansion of its number of bungalows is a good investment Management for Maggie's Resorts developed the following estimates for the expansion: Maggie's Resorts Number of additional guests per day 490 Average number of days guests will stay 16 Useful life of the expansion in years 17 Average cash spent per day by guest $255 Average variable costs per day for each guest $85 Cost of the expansion $7.901,000 Discount rate 13% Maggie's Resorts uses straight-line depreciation and expects the expansion to have a residual value of $999,000 at the end of its 17 year life. (Round your answers to two decimal places when needed and use rounded answers for all future calculations). 1. Compute the average annual net cash flow from the expansion. Additional Guest per day X Average cash spent by each guest per day Number of days guests will stay Average Annual Cash Inflow Additional Guest per day Average variable cost by each guest per day X Number of days guests will stay Average Annual Cash Outflow X Average Annual Cash Inflow Average Annual Cash Outflow Average annual net cash inflow 2. Compute the average annual operating income from expansion. Average Annual net cash inflow Operating life of Expansion Total net cash inflows during life of expansion Cost - Residual Value = Total depreciation during life of expansion Maggie's Resorts Total net cash inflows during operation life of expansion Less: Total depreciation during operating life of expansion Total operating income during operating life Divide by: expansions operating life in years Average annual operating income from expansion 3. Compute the payback for the expansion project. Amount Invested / Exprected annual net cash inflow = Payback 1 11 4. Calculate the ARR. (Amount Invested + Residual Value) / 2 = Average amount invested / 2 = Average Annual Operating Income / Average Amount Invested ARR (%) / 11