Deer Valley Lodge, a ski resort in the Wasatch Mountains of Utah, hasplans to eventually add five new chairlifts. Suppose that one liftcosts $2 million, and preparing the slope and installing the liftcosts another $1.3 million. The lift will allow 300 additional skierson the slopes, but there are only 40 days a year when the extracapacity will be needed. (Assume that Deer Valley Lodge will sell all300 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 thelift tickets at Deer Valley cost $55 a day. The new lift has aneconomic life of 20 years. Assume that the before-tax required rate ofreturn for Deer Valley is 14%. Compute the before-tax NPV of the newlift and advise the managers of Deer Valley about whether adding thelift will be a profitable investment. Show calculations to supportyour answer. Assume that the after-tax required rate of return forDeer Valley is 8%, the income tax rate is 40%, and the MACRS recoveryperiod is 10 years.
Compute the after-tax NPV of the new lift andadvise the managers of Deer Valley about whether adding the lift willbe a profitable investment. Show calculations to support your answer.What subjective factors would affect the investment decision?