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

PV of tax savings =...

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