91Ó°ÊÓ

The process of evaluating various available investments is known as capital budgeting. This process compares the benchmarks with the expected return from the investment.

The payback period will not change due to a change in the residual value because, in the calculation of the payback period, expected annual cash flow is considered, which is not adjusted with the depreciation expenses. The change in residual value will affect the depreciation expenses and will not affect the expected annual cash flow. The payback period will remain the same, i.e., 4.1 years.

The accounting rate of return will decrease when the residual value becomes $0. The calculation is shown below:

$\begin{array}{c}\mathrm{ARR}=\frac{\mathrm{Average}\mathrm{annual}\mathrm{operating}\mathrm{income}}{\mathrm{Average}\mathrm{amount}\mathrm{invested}}\\ =\frac{\mathrm{\$}1,143,327.43}{\mathrm{\$}5,800,000}\\ =19.71\mathrm{\%}\end{array}$

Working note:

data-custom-editor="chemistry" $\begin{array}{c}\mathrm{Average}\mathrm{annual}\mathrm{net}\mathrm{cash}\mathrm{flow}=\left(\begin{array}{l}\mathrm{Number}\mathrm{of}\mathrm{additional}\mathrm{skiers}×\mathrm{Averagenumber}\mathrm{of}\mathrm{days}\mathrm{allow}\mathrm{skiing}×\\ \left(\mathrm{Average}\mathrm{cash}\mathrm{spent}\mathrm{by}\mathrm{skier}-\mathrm{Average}\mathrm{variable}\mathrm{cost}\mathrm{per}\mathrm{skier}\right)\end{array}\right)\\ =\left(121×142\left(\mathrm{\$}241-\mathrm{\$}83\right)\right)\\ =\mathrm{\$}2,714,756\end{array}$

$\begin{array}{c}\mathrm{Average}\text{ }\mathrm{annual}\text{ }\mathrm{operating}\text{ }\mathrm{income}=\mathrm{Average}\text{ }\mathrm{annual}\text{ }\mathrm{net}\text{ }\mathrm{cash}\text{ }\mathrm{inflow}-\mathrm{Depreciation}\\ =\mathrm{\$}2,714,756-\mathrm{\$}1,571,428.57\\ =\mathrm{\$}1,143,327.43\end{array}$

Calculation-Calculation of depreciation on a straight-line method.

$\begin{array}{c}\mathrm{Depreciation}=\frac{\mathrm{Cost}−\mathrm{Residual}\text{ }\mathrm{value}}{}\\ =\frac{\mathrm{\$}11,000,000−\mathrm{\$}0}{}\\ =\mathrm{\$}1,571,428.57\end{array}$

$\begin{array}{c}\mathrm{Average}\mathrm{amount}\mathrm{invested}=\frac{\mathrm{Amount}\mathrm{invested}+\mathrm{Residual}\mathrm{value}}{}\\ =\frac{\mathrm{\$}11,000,000+\mathrm{\$}600,000}{}\\ =\mathrm{\$}5,800,000\end{array}$

Hunter valley will consider this project further because both the project evaluation parameters reflect a good position. The payback period is less than the maximum payback period, and the accounting rate of return is higher than the maximum accounting rate of return.