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.
Investment = $2,000,000 + $1,300,000= $3, 300,000
Inflow = 300 Skiers *40 days*$55/ skier/day = $660,000
Outflow = (200days*$500/day) = $100,000
PV @14% = ($660,000- $100,000) * 6.623= $3,708,880
NPV = $3,708,880- $3,300,000 = $408,880
Adding the new lift is a profitable investment, the lift will create value of $408,880
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.
After cash flow equals $560,000*.6 = $336,000
Cash flows at 8% = $336,000*9.818 = $3,298,848
Tax savings equals $3, 300,000 *.4*.7059 = $931,788
NPV after Tax equals $3,298,848 =$931,788 - $3, 300,000 = $930,636
The lift is has more value after tax than before taxes
3. What subjective factors would affect the investment decision?
Inclement weather will have a factor on additional skiers
Less crowding which in turn makes of more satisfied customers
Other items purchased by additional skiers such as food and rental equipment...