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. 1. 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. 2. 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. 3. What subjective factors would affect the investment decision? • The amount of the investment-

• The gross sales of tickets-
• The Total expenses-
• The yearly net income from investments

1.Investment = $2,000,000 + $1,300,000 = $3,300,000
Annual cash inflow = 300 skiers x 40 days x $55/skier-day = $660,000 Annual cash outflow
= (200 days x $500/day)+($5/skier-day x 300 x 40) = $160,000

PV of cash flows @ 14% = ($660,000 - $160,000) x 6.6231 = $3,311,550

NPV = $3,311,550 - $3,300,000 = $11,550

The new lift will create value of $11,550, so it is a profitable investment.

2.After-tax cash flows = $500,000 x .6 = $300,000

PV of after-tax cash flows @ 8% = $300,000 x 9.8181 = $2,945,430

...American Intercontinental University
Managerial Accounting 310
Instructor: Matt Keogh
Introduction
“Net Present Value (NPV) is the present value of the net cash inflows generated by a project including salvage value, if any, less the initial investment on the project,” (Irfanullah, Jan., 2013). It is preferred as one of the most reliable measures employed in capital budgeting since it accounts for the time value of money as it uses the discounted cash inflows. The net cash inflow is equivalent to the total cash inflow during a given period less the expenses incurred directly on generating the cash inflow. In assessing capital budgeting with this method, a target rate of return is usually set which is used to discount the net cash inflows from a project.
NPV method provides better decisions than other methods when making capital investment. When choosing between competing investments by applying NPV calculation method then: if NPV>0 we accept the investment; if NPV<0 we reject the investment; and when NPV=0 then the investment is marginal (Wilkinson, J., 2015). The formula for calculating NPV is (Finance Formulas, 2015)
Where
When the cash flows are equal then the formula for NPV simplifies to (Finance Formulas, 2015)
Where
This task in this individual project involves applying the net present value, both pre-tax and...

...Tax Avoidance Analysis
Tax Avoidance is a legally manipulation for the corporations to lower their tax bill by structuring transactions, is also called tax planning. Different with Tax Evasion, the Tax Evasion is Criminal and completely illegal. And in generally, company which have more profit should have higher tax rate, but with the growth of the company, many tax avoidance strategy were used by management as result of minimize the tax bills and also without obey the law, There are 3 strategies that I would talk about the most common way that company would use in order to shrink their tax bill with out breaking the law. These strategies would defiantly benefit for the companies and decrease the income of government. Government would rewrite or make new tax code or regulations to defense new coming way of tax avoidance. In the next 3 chapters, I would talk about 3 strategies for company, delay income and accelerate deductions, Tax loophole, and Tax haven. Delay income and accelerate deductions is the most reasonable, and safety way. Tax loophole are like on the backdoor of tax law, once the tax regulations been rewrite in time, the loophole would not exist. And tax haven are obviously different with other two ways, it...

...Net Present Value
Net present value (NPV) and Internal rate of return (IRR) are used to determine whether to accept a project or not.Net Present Value (NPV)Net present value is the difference between the present value of cash inflows and the present value of cash outflows. It is used in capital budgeting to analyze the profitability of an investment or project.
NPV= sum[CFt/(1+r)t]-C0
CFt– cash flow in the time t
C0 – initial investment
r – periodic interest rate
NPV rule:
Accept all independent projects with NPV greater than 0 as they add value to shareholder. In case of mutually exclusive projects, the project with the highest NPV should be chosen
Advantages:
Direct measure of the dollar contribution to the stockholders.
NPV method is preferable for non-normal cash flows (e.g. negative cash flows)
Disadvantage:
Does NOT measure the project size.
Internal Rate of Return (IRR)
The discount rate makes the net present value of all cash flows from a project equal to zero. The higher a project's internal rate of return, the more desirable it is to undertake the project. IRR can be used to rank several prospective projects a firm is considering.
NPV= Sum[CFt/(1+r)t]–C0
r = internal rate of return (IRR)
IRR rule:
Accept all independent projects with IRR greater than cost of capital. In case of mutually exclusive projects, the project with...

...government regulations. There are three categories of investment decisions: acceptance or rejection, ranking of projects, and choosing between projects. To assess whether it is viable to invest or not the NPV technique can be used to compare the present value of returns and costs. If the NPV is negative it implies that costs exceed returns and hence it would not be advisable to invest in such projects. There are also other investment appraisal techniques that are employed apart from the NPV; these are the pay back method, accounting rate of return and internal rate of return method.
Net present value (NPV) is generally considered as the most correct method for investment
appraisal because it focuses on cash and takes into account the time value of money and riskiness
of the investment project. The method is hence consistent with the objective of shareholder
wealth maximization (Shapiro, 2005). The net present value of an investment project is the
present value of the net cash inflows less the project’s initial investment outlay. If the resulting
NPV is positive, the company should accept the investment project; if it’s negative, the project
should be rejected. In mutually exclusive projects, the investment with higher net present value
should be accepted (Drury, 2004).
The use of NPV technique, which is the most appropriate to evaluate investment projects, require the identification of a...

...Comparing Net Present Value and Internal Rate of Return
by Harold Bierman, Jr
Executive Summary
• • • Net present value (NPV) and internal rate of return (IRR) are two very practical discounted cash flow (DCF) calculations used for making capital budgeting decisions. NPV and IRR lead to the same decisions with investments that are independent. With mutually exclusive investments, the NPV method is easier to use and more reliable.
Introduction
To this point neither of the two discounted cash flow procedures for evaluating an investment is obviously incorrect. In many situations, the internal rate of return (IRR) procedure will lead to the same decision as the net present value (NPV) procedure, but there are also times when the IRR may lead to different decisions from those obtained by using the net present value procedure. When the two methods lead to different decisions, the net present value method tends to give better decisions. It is sometimes possible to use the IRR method in such a way that it gives the same results as the NPV method. For this to occur, it is necessary that the rate of discount at which it is appropriate to discount future cash proceeds be the same for all future years. If the appropriate rate of interest varies from year to year, then the two procedures may not give identical answers. It is easy to use the NPV method correctly. It is much more difficult to...

...College of University of Phoenix
Credit Policy Decisions
Collins Office Supplies is considering a more liberal credit policy to increase sales, but expects that 9 percent of the new accounts will be uncollectible. Collection costs are 5 percent of new sales, production and selling costs are 78 percent, and accounts receivable turnover is five times. Assume income taxes of 30 percent and an increase in sales of $80,000. No other asset buildup will be required to service the new accounts.
a. What is the level of accounts receivable needed to support this sales expansion?
Answer- Level needed is [pic]
b. What would be Collins’s incremental after-tax return on investment?
80,000 – 7,200 = 72,800-4,000-62,400=6,450-1,920= $4,480 which is equal to 28 percent.
c. Should Collins liberalize credit if a 15 percent after-tax return on investment is required? Assume Collins also needs to increase its level of inventory to support new sales and that inventory turnover is four times.
Yes, the actual return was higher than the requirement.
d. What would be the total incremental investment in accounts receivable and inventory to support an $80,000 increase in sales?
Inventory 20,000+Accounts 16,000 = 36,000 which would be a 12.44 percent return.
e. Given the income determined in part b and the investment determined in part d, should Collins extend more liberal credit terms?
Absolutely not, 12.44 percent...

...ADVANTAGES AND DISADVANTAGES OF USINFG NPV (NET PRESENT VALUE) AND IRR (INTERNAL RATE OF RETURN)”
NPV (NET PRESENT VALUE)
The difference between the present value of cash inflows and the present value of cash outflows. NPV is used in capital budgeting to analyze the profitability of an investment or project. NPV analysis is sensitive to the reliability of future cash inflows that an investment or project will yield.NPV compares the value of a dollar today to the value of that same dollar in the future, taking inflation and returns into account. If the NPV of a prospective project is positive, it should be accepted. However, if NPV is negative, the project should probably be rejected because cash flows will also be negative.
Net present value, or NPV, is one of the calculations business managers use to evaluate capital projects. A capital project is a long-term investment or improvement, such as building a new store. The NPV calculation determines the present value of the project's projected future income. In the calculation, the present value of the project's cost is subtracted from the present value of future income. A positive net present value usually means you should accept or implement the project. Business owners who compare two or more projects tend to favor the one with the higher net present value.
ADVANTAGES OF NET PRESENT VALUE...

...When cash inflows are even:
NPV = R ×
1 − (1 + i)-n
− Initial Investment
i
In the above formula,
R is the net cash inflow expected to be received each period;
i is the required rate of return per period;
n are the number of periods during which the project is expected to operate and generate cash inflows.
When cash inflows are uneven:
NPV =
R1
+
R2
+
R3
+ ...
− Initial Investment
(1 + i)1
(1 + i)2
(1 + i)3
Where,
i is the target rate of return per period;
R1 is the net cash inflow during the first period;
R2 is the net cash inflow during the second period;
R3 is the net cash inflow during the third period, and so on ... Each cash inflow/outflow is discounted back to its present value (PV). Then they are summed. Therefore NPV is the sum of all terms,
where
– the time of the cash flow
– the discount rate (the rate of return that could be earned on an investment in the financial markets with similar risk.); the opportunity cost of capital
– the net cash flow i.e. cash inflow – cash outflow, at time t . For educational purposes, is commonly placed to the left of the sum to emphasize its role as (minus) the investment.
The result of this formula is multiplied with the Annual Net cash in-flows and reduced by Initial Cash outlay the present value but in cases where the cash flows are not equal in amount, then the previous formula will be used to determine the present value of each...