Question

Consider how Hunter Valley Snow Park Lodge could use capital budgeting to decide whether the $11,000,000 Snow Park Lodge expansion would be a good investment. Assume Hunter Valley's managers developed the following estimates concerning the expansion: : (Click the icon to view the estimates.) Assume that Hunter Valley uses the straight-line depreciation method and expects the lodge expansion to have residual value of $600,000 at the end of its seven-year life. The average annual net cash inflow from the expansion is expected to be $2,714,756. Compute the payback for the expansion project. Round to one decimal place. Expected annual net cash inflow = Payback years Data Table 121 skiers Number of additional skiers per day Average number of days per year that weather conditions allow skiing at Hunter Valley Useful life of expansion (in years) Average cash spent by each skier per day Average variable cost of serving each skier per day Cost of expansion Discount rate 142 days 7 years 241 83 11,000,000 10%

Answer 1

The payback period for the Snow Park Lodge expansion project is approximately 4.1 years.

Step-by-step explanation:

The payback period is a method used in capital budgeting to determine the time it takes for a project to recover its initial investment. It can be calculated by dividing the initial investment by the average annual net cash inflow. In this case, the initial investment is $11,000,000 and the average annual net cash inflow is $2,714,756.

To calculate the payback period:

1. Divide the initial investment by the average annual net cash inflow: $11,000,000 / $2,714,756 = 4.06 (rounded to one decimal place).
2. The payback period for the Snow Park Lodge expansion project is approximately 4.1 years.