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Answer |
Deer Valley Lodge, a ski resort in the Wasatch Mountains of Utah, has plans to eventually add five new chairlifts. Suppose that one lift costs $2 million, and preparing the slope and installing the lift costs another $1.3 million. The lift will allow 300 additional skiers on the slopes, but there are only 40 days a year when the extra capacity will be needed. (Assume that Deer park will sell all 300 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 the lift tickets at Deer Valley cost $55 a day. The new lift has an economic life of 20 years.
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.
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.
What subjective factors would affect the investment decision?
I don't need answers exactly. But more of formulas or how to calculate the answer. |
| Answer |
To find the before-tax NVP:
-Take the net income and multiply it by the NPV factor, which should be given to you.
-Find the factor for an annuity for 20 years at 14%, since you want to make 14% on the investment.
-Once you find the annuity factor, multiply it by the net income per year and this will equal the NVP.
-Compare your result to the invested amount. If your result is greater than the investment, then it will be a good investment.
To find the after-tax NVP:
-Since the tax rate is 40%, the government will be given 40% of the income, and 60% of the income will be saved. Multiply the income by the percentage left after taxes. This will give you the annuity.
-Find the annuity factor for 20 years at 8%. Multiply this result by the after-tax net income and this will equal the NVP.
Subjective factors that could affect the investment decision:
-One example is weather, which could cause the company to some income. |
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