Problem: Deer Valley Lodge, has plans to add 5 new chairlifts. Suppose that one lift costs $2 million & preparing the slope & installation is additional $1.3 million.
The lift will allow 300 additional skiers but there are only 40 days when the additional capacity is needed.(Assume Deer Park will sell all 300 lift tickets on those 40 days)
Running the lift = $500 /day for 200 days.
Lift ticket cost $55/day & added cash expense for each skier is $5
Economic life = 20 years.
Problem 1: Assume that before tax required rate of return is 14%. Compute the before-tax NPV of new lift & advise managers of Deer Park if it will be profitable. Show calculations
Problem 2: Assume the after tax required rate of return for Deer Park is 8%, the income tax rate is 40%, & MACRS recovery period is 10 years.
Compute the after tax NPV of the new lift & advise managers of Deer Park if lift will be profitable. Show calculations
Problem 3: What subjective factors if any affect this investment decision?