-   -   NPV of the Deer Valley Lodge (https://www.askmehelpdesk.com/accounting/npv-deer-valley-lodge-399310.html)

• Sep 23, 2009, 07:32 PM
655885
NPV of the Deer Valley Lodge
Deer Valley Lodge, a ski resort in the Wasatch Mountains of Utah, has plans to eventually add five new chairlifts. Suppose that one lift costs \$2 million, and preparing the slope and installing the lift costs another \$1.3 million. The lift will allow 300 additional skiers on the slopes, but there are only 40 days a year when the extra capacity will be needed. (Assume that Deer park will sell all 300 lift tickets on those 40 days.) Running the new lift will cost \$500 a day for the entire 200 days the lodge is open. Assume that the lift tickets at Deer Valley cost \$55 a day. The new lift has an economic life of 20 years.

Assume that the before-tax required rate of return for Deer Valley is 14%. Compute the before-tax NPV of the new lift and advise the managers of Deer Valley about whether adding the lift will be a profitable investment. Show calculations to support your answer.
Assume that the after-tax required rate of return for Deer Valley is 8%, the income tax rate is 40%, and the MACRS recovery period is 10 years. Compute the after-tax NPV of the new lift and advise the managers of Deer Valley about whether adding the lift will be a profitable investment. Show calculations to support your answer.
What subjective factors would affect the investment decision?
• Sep 24, 2009, 04:48 AM
ArcSine

Back to you.
• Jul 7, 2012, 07:26 AM
aliciaemmanuel
Question 1.
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.

Question 2.
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.

Question 3.
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.
• Aug 17, 2012, 07:21 PM
chriskuhl
On Question 2, where did you come up with the "X" (1-0.4) =0.6??

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