The "Yellow Snow" Dilemma
1. What are the risks to J.R. Murray and Snowbowl if they decide to move forward with the Environmental Impact Statement (EIS)? What are the risks of not moving forward?
2. Do the partners of Arizona Snowbowl Resort Limited Partnership have a moral/ethical responsibility to abandon the project and possibly lose their invested capital in light of the cultural concerns of a segment of the population (the Native American community) or are the partners justified allowing the decision to be made by the USFS and the judicial system?
3. What type of analyses would be useful in helping make the decision whether or not to proceed with EIS?What other information would you find useful to aid in the decision making process?
4. (a) Use the information provided in the case and calculate the weighted average cost of capital (WACC) for Arizona Snowbowl.
(b) Do you believe the WACC you calculated in part (a) accurately reflects Snowbowl's WACC? If so, why? If not, explain why not and give your estimate of Snowbowl's accurate WACC. Justify your answer.
5. Generate depreciation schedules for the EIS and for the remaining investment required for the project.
6. Calculate "base cash" cash flows resulting from the project for each of the next 13 years. Use the following assumptions: The anticipated increase in skier days occurs immediately upon completion of the project, beginning in 2006. The projected growth rate in cash flows beyond the 10 year planning period is 5%.
7. Calculate the net present value of the project based on the "base cash" cash flows from question 7 and your estimate of the WACC from question 5 part (b).
8. (a) Do a sensitivity analysis of the project by allowing the following inputs to vary +/- 10 percent and calculating the resulting effect on NPV (Change one variable at a time resulting in 6 different NPV estimates):
b. The increase in the number of skier/snowtuber visits
c. Growth rate beyond year 10
9. As pointed out in the case, there is a significant possibility that, even if the Snowbowl prepares the EIS and applies for regulatory approval, it will be denied by the USFS, or by the courts in which case the Snowbowl would spend $750,000 for the EIS and get no return (10% probability). Calculate the expected NPV of the project if the probability that the project will be approved is 90%. For this calculation, use the "base cash" cash flows developed in response to question 7, and your estimate of the cost of capital from question 5 (b).
Note: Calculate NPV of EIS alone - spend $750,000 and get depreciation tax shields only.
Should J.R. recommend that the partners move forward with the EIS?