# Deer Valley Lodge

### Deer Valley Lodge

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

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