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crazy4tobe · Apr 21, 2009, 01:14 PM

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?
We will be considering the additional income realized from this project. We are only considering the addition of one lift, not five.

1. Calculate the amount of the investment that the company will be making in this project.

2. Calculate the gross sales that the company will realize from the sell of tickets to the additional customers each year.

3. Calculate the yearly expenses that the company will have for this lift.

4. Calculate the amount of net cash inflow (net income) that the company will realize each year. This will be the amount from the sell of tickets (question 2) minus the expenses for the project (question 3). Do not multiply by 20. The net present value will be determined by using the yearly amount.

5. Compute the net present value of the before tax net cash inflow (net income).

a. Based on this information, is this a good investment?

6. This question requires three steps.

a. Determine the after tax net cash flow (net income)?

I. Determine the NPV of the after tax net cash flow (net income)?

b. Determine the tax savings from the investment. (Hint: This is based on the amount of the investment).

I. Determine the NPV of the tax savings.

c. Add the NPV of the after tax net cash flow (net income) from 6-a to the NPV of the tax savings from 6-b. This is the total after tax NPV.

d. Based on this information, is this a good investment?

7. What are the subjective factors that will influence our decision? What will affect our decision other than the calculations we have made above? Remember, the above calculations are based on estimates. What may affect these estimates in a good or bad way?

morgaine300 · Apr 21, 2009, 04:17 PM

Please see the guidelines about posting homework problems:

Ask Me Help Desk - Announcements in Forum : Homework Help

Never minding the guidelines, wow, long problem. Did you actually think someone should just work that whole thing through for you?

crazy4tobe · Apr 22, 2009, 10:36 AM

No, I just thought that maybe might be able to give sample problems in math form, so that I could better understand how to do it. You know like before.. I just to be able to understand in numerical form.

morgaine300 · Apr 22, 2009, 06:56 PM

There are 14 questions up there. You want an example of something that long? Doesn't your textbook have one?

crazy4tobe · Apr 22, 2009, 09:32 PM

Im sure it does. However, my textbook seems to have been misplaced. I am very frusrtated. I don't need the answers just a sample to get me started. I am currently trying to get my instructor send me the lecture notes with the sample problems. This is the last week for this class so ordering another book is out of the question. I only need help figuring out the first 3. Once I have a better understanding of it I will be fine.

morgaine300 · Apr 22, 2009, 10:36 PM

I kind of don't think you get how long and complicated these can be. It's a little difficult to get someone "started." There's too many pieces, lots of different ways to do them, and different orders you can do the pieces in. But as for the first three questions:

Suppose that one lift costs $2 million, and preparing the slope and installing the lift costs another $1.3 million.

That's your investment.

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.) Assume that the lift tickets at Deer Valley cost $55 a day.

That's your revenue.

Running the new lift will cost $500 a day for the entire 200 days the lodge is open.

That's your expenses. (Not including all the depreciation and tax effects.)

It's a matter of just reading carefully and pulling those pieces out of there.

I'm not attempting to be dismissive. It's just too dang difficult to try to get someone started or give some hints on one of these things. It requires sitting down and working it out one thing at a time. This just isn't the best medium for something like this, unless you can do most of the work and someone can just correct you in certain places.