Detemine the before-tax npv of the new lift

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Reference no: EM131656936

Assignment

Length: 1 page and 1 excel spreadsheet

Consider the following scenario:

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 Valley Lodge 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.

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.

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.

3. What subjective factors would affect the investment decision?

Present Value of $1 MACRS Depreciation

 

Discount Rate

Recovery Period (Years)

3

5

7

10

3%

0.9439

0.9215

0.3900

0.8698

4%

0.9264

0.8975

0.8704

0.8324

5%

0.9095

0.8746

0.8422

0.7975

6%

0.8931

0.8526

0.8155

0.7649

7%

0.8772

0.8315

0.7902

0.7344

8%

0.8617

0.8113

0.7661

0.7059

9%

0.8568

0.7919

0.7432

0.6792

10%

0.8322

0.7733

0.7214

0.6541

12%

0.8044

0.7381

0.6810

0.6084

14%

0.7782

0.7055

0.6441

0.5678

15%

0.7657

0.6902

0.6270

0.5492

16%

0.7535

0.6753

0.6106

0.5317

18%

0.7300

0.6473

0.5798

0.4993

20%

0.7079

0.6211

0.5517

0.4702

22%

0.6868

0.5968

0.3526

0.4439

24%

0.6669

0.5740

0.5019

0.4201

25%

0.6573

0.5631

0.4906

0.4090

26%

0.6479

0.5526

0.4798

0.3985

28%

0.6299

0.5327

0.4594

0.3787

30%

0.6128

0.5139

0.4404

0.3606

40%

0.5381

0.4352

0.3632

0.2896


For assistance with your assignment, please use this table your text, Web resources, and all course materials.

Reference no: EM131656936

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