Q12SE - Horngren'S Financial And Managerial Accounting

Question

Refer to the Hunter Valley Snow Park Lodge expansion project in Short Exercise S26- 4. What is the project’s NPV (round to nearest dollar)? Is the investment attractive? Why or why not?

Step-by-Step Solution

Answer

The investment is attractive and the net present value is $2,523,232.

Step 1: Definition of Net Present Value

A metric that determines the present value of all the stream of cash inflows that will be received in the future period of time is known as net present value. It is also used in capital budgeting.

Step 2: Analysis of Project using NPV

Time	Particular	Net cash inflow	Ordinary annuity PV factor	PV factor	Present value
1-7years	PV of annuity	$2,714,756	4.868	-	13,215,432.21
7 years	Residual value	$600,000	-	0.513	$307,800
Total PV of net cash flow	$13,523,232.21
0	Initial investment				($11,000,000)
Net present value of the project	$2,523,232

Note: The project’s net present value is positive; therefore, the investment is attractive. 

Working note:

$\begin{array}{rcl}Arverage annualnet cash flow& =& \left(\begin{array}{c}Number of additional skiers\times Average number of day allow skiing\times \\ \left(Average cash spent by skier-Average variable cost per skier\right)\end{array}\right)\\ & =& \left(121\times 142\left(\$241-\$83\right)\right)\\ & =& \$2,714,756\end{array}$