Question

Consider how Flint Valley, a popular ski resort, could use capital budgeting to decide whether the $19.5 million Waterfall Park Lodge expansion would be a good investment.

Which of the following capital budgeting methods could Flint Valley use to evaluate the Waterfall Park Lodge expansion?
(a) Net present value (NPV)
(b) Internal rate of return (IRR)
(c) Payback period
(d) All of the above

Answer 1

Flint Valley can use Net present value (NPV), Internal rate of return (IRR), and Payback period methods to evaluate the $19.5 million Waterfall Park Lodge expansion, each offering different insights on the potential investment's profitability, liquidity, and risk.

Step-by-step explanation:

To evaluate the potential $19.5 million Waterfall Park Lodge expansion, Flint Valley could utilize several capital budgeting methods: Net present value (NPV), Internal rate of return (IRR), and Payback period. NPV compares the value of a dollar today to the value of that same dollar in the future, taking inflation and returns into account. The IRR is the interest rate at which the net present value of all the cash flows (both positive and negative) from a project or investment equals zero. The payback period calculates the length of time required to recover the cost of an investment.

These methods provide various perspectives: NPV estimates the profitability, IRR gives a break-even interest rate for the investment, and payback period offers insight into the liquidity and risk associated with the project. While these metrics are useful, they also have limitations and should be used in conjunction with each other to get a comprehensive understanding of the potential investment. When it comes to funding such investment projects, businesses have options like sourcing from early-stage investors, reinvesting profits, borrowing, or selling stock.