Question

Consider how Pine Valley, a popular ski resort, could use capital budgeting to decide whether the $8.5 million Stream Park Lodge expansion would be a good investment. B. (Click the icon to view the expansion estimates.) Assume that Pine Valley uses the straight-line depreciation method and expects the lodge expansion to have a residual value of $500,000 at the end of its ten-year life. Read the requirements. Requirement 1. Compute the average annual net cash inflow from the expansion. First enter the formula, then compute the average annual net cash inflow from the expansion. (Round your answer to the nearest dollar.) Average annual net cash inflow

Please answer all of the 4 requirements.

Answer 1

	1	Computation of average annual net inflow from expansion:-
		Gross Inflow	44,27,871	(119 X 157 X 237)
		Less: Variable Cost	-25,03,522	(119 X 157 X 134)
		Annual Net Inflow	19,24,349
		Net inflow for 10 Years	1,92,43,490
		Total net inflow for 10 Years	1,92,43,490
		Average annual net inflow	19,24,349
	2	Computation of average annual Operating Income from expansion:-
		Gross Inflow	44,27,871
		Less: Variable Cost	-25,03,522
		Less: Depreciation ( 8,500,000-500,000)/10	-8,00,000
		Annual Operating Income	11,24,349
		Operating Income for 10 Years	1,12,43,490
		Average annual operating income	11,24,349
	3	Computation of payback period
		= Initial Investment/ annual net inflow
		= 85,00,000 / 19,24,349
		= 4.41 years
	4	Computation of ARR:-
		= Average annual operating Income	X 100
		Initial Investment
		= 11,24,349 X 100
		85,00,000
		=13.23%