Question

Consider how Pine Valley, a popular ski resort, could use capial budgoting to decide whether the $8 milion Bigzand Park Lodga efrgareicon would be a good investmont. (Cick the icon to viow the expansion estimates), (Cick the icon to view the present value annuly factor table.) (Cick the icon to view the prosont value fictor tatio ) (CSick the ioon to view the future value annuty factor tablo.) (Cick the icon to vien the future value tactor table.) Read the feouiremants. Requirement 1. What is the projecis NPV? is the invostinont atractive? Why or why not? Calculate the net present value of the expansion. (Round your inswor to the nearest wholo doilar. Use porentheses or a minus sign for a negative net prisint valian) Not prosont value of expansion Requirements 1. What is the progects NPV? is the invostment atractive? Why or why nol? 2. Assuine the expantion has no residbal value. What is the projecrs NPV? is the invostment stil atradive? Why or wny nol? Assume that Pine Valley's managers developed the following estimates concerning a planned expansion to its Blizzard Park Lodge (all numbers assumed): Number of additional skiers per day ............. 121 Average number of days per year that weather conditions allow skiing at Pine Valley. Useful life of expansion (in years) Average cash spent by each skier per day ......... \$ 242 Average variable cost of serving each skier per day . \$ 142 Cost of expansion......................... $8,000,000 Discount rate ............................... 14% expects the lodge expansion to have a residual value of $500,000 at the end of its eight-year life. It has already calculated the average annual net cash inflow per year to be $1,960,200.

Answer 1

To determine the attractiveness of the investment in Pine Valley's Blizzard Park Lodge expansion, we calculate the NPV by discounting the future cash inflows and the residual value, then subtracting the initial cost of the expansion. A positive NPV indicates an attractive investment, and a negative NPV suggests otherwise. This process will be repeated assuming no residual value to assess its impact on the investment's appeal.

Step-by-step explanation:

To calculate the net present value (NPV) of the expansion project at Pine Valley's Blizzard Park Lodge, we need to discount the future cash inflows back to their present value and subtract the initial investment. The forecasted cash inflow is calculated based on the number of additional skiers, the days they can ski, and the net cash spent by each. Given the cost of the expansion, the useful life, the discount rate, and the estimated residual value, we can determine if the investment is attractive by whether the NPV is positive or negative.

First, we find the present value of the predicted annual cash inflow using the discount rate of 14%. Then, we add the present value of the residual value at the end of the eight-year life of the expansion. After summing these values, we subtract the initial investment of $8 million to find the NPV. If the NPV is positive, the investment is deemed attractive as it is expected to add value to the firm.

If the expansion is assumed to have no residual value, we simply calculate the present value of the annual cash flows and subtract the initial investment to re-evaluate the NPV. A positive NPV would again suggest the investment is worthwhile, whereas a negative NPV would suggest the opposite.