(L. OBJ. 2) Using the payback and accounting rate of return methods to make capital inve...

(L. OBJ. 2) Using the payback and accounting rate of return methods to make capital investment decisions [10 min]

Consider how White Valley Snow Park Lodge could use capital budgeting to decide whether the $12,500,000 Brook Park Lodge expansion would be a good investment. Assume White Valley’s managers developed the following estimates concerning the expansion:

Assume that White Valley uses the straight-line depreciation method and expects the lodge expansion to have a residual value of $600,000 at the end of its 12-year life.

Requirements

1. Compute the average annual net cash inflow from the expansion.

2. Compute the average annual operating income from the expansion.