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Cash Flow Npv

In: Business and Management

Submitted By cortiajohson
Words 920
Pages 4
1. Assume that the before-tax required rate of return for Deer Valley is 14%. Compare the before-tax NPV of the new lift and advise the managers of Deer Valley about whether adding the lift will be profitable investment. Show calculations to support your answer.

We have to calculate the net present value of cash flows and compare this amount to the cost of investments.

Net present value of cash flows

(cash inflow – cash outflow) X the factor for PV of cash flows for ordinary annuity of $1 at 14% for 20 years, which is 6.6231 take from PV Table 1.

Cash Inflow
Additional skiers that the lift will allow x number of days per year when extra capacity will be needed x cost of lift ticket a day

Additional skiers that the lift will allow 300
X number of days per year when extra capacity will be needed 40
X cost of lift ticket a day $55 .
= Cash Inflow $660,000

Cash Outflow
Cost of running the lift per day x number of days the lodge will be open

Cost of running the lift per day $500
X number of days the lodge is open 200 .
= Cash Outflow 100,000

Present value of net cash flow
Net cash flows = cash inflow – cash outflow Cash inflow $660,000
Less Cash Outflow $100,000
= Net cash flows $560,000

Net present value of cash flows
Net cash flows x the factor for P V of cash flows for ordinary annuity of $1 at 14% for 20 years is 6.231 taken from PV Table 1

Net Cash flows $560,000
X The factor for P V of cash flows for ordinary annuity 6.6231 Net present value of cash flows $3,708,936

Cost of the Investment = Cost of the lift + cost of preparing the slop and installing the lift

Cost of the lift $2,000,000
+ Cost of preparing the slop and installing the lift...

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