Computation of before tax NVP of new lift and advice to managers is as follows:
Investment by Deer valley Ski Lodge = Cost of one lift plus slope preparation and installation cost of new lift.
Investment = $2,000,000 + $1,300,000 = $3,3000,000
Incremental costs = $500 per day x 200 days = $100,000.00
Annual cash flow = 300 skiers x 40 days worked x $55.00 per day per skier
= 300 x 40 = 12,000
= 12,000 x $55.00 = $660,000.00
Net Cash flow = $660,000.00 - $100,000.00 = $560,000.00
Percentage value (PV) of cash flows at 14% = $560,000.00 x 6.6231= $3,708,936.00
Net Percentage Value (NPV) = $3,708,936.00 - $3,300,000.00 = $408,936.00
Based on the above profit of $408,880.00 I will say that it will be profitable for the managers of Deer Valley Lodge to invest in the new lift.
After tax cash flow = $560,000.00 x (1-0.4)
= 0.6 x $560,000.00 = $336,000.00
PV of after tax cash flow @8% = $336,000.00 x 9.8181= $3,298,882.00
Profit tax savings = $3,300,000.00 x .4 x .705923 = $931,819.00
Net after tax = $3,298,882.00 + $931,819.00 - $3,300,000.00 = $930,701.00
The investment on the lift will be more profitable in an after tax basis versus the pretax basis.
The factors that I will see as subjective that can affect the decision are as follows:
• If bad weather occurs then the estimated amount of skiers expected to come to Deer Valley Lodge can be less than estimated amount.
• Even if the additional lift make customers more happy and satisfied that does not guarantee that more skiers will be attracted into coming to Deer Valley Lodge.
• If additional skiers visit though profits can rise because more food will be purchased and more equipment will be rented from the additional customers and if no more additional customers come there can be a drop in the rental of equipment and purchase of food and that can result in less or no profit.