Question: Deer Valley Lodge has a plan to add 5 new lifts. One lift costs $2million preparing the slope & installing another lift costs $1.3 million.
Lift allows 300 add'tl skiers on slope, however,there are only 40 days a year when the extra capacity will be needed. Assuming Deer park will sell all 300 lift tickets on those 40 days.
Running the new lift will cost$500 a day for entire 200 days the lodge is open.
Lift tix = $55 a day. & the added cash expenses for each skier are$5. 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 & advise managers if it will be profitable. Show calculations.
2. Assume the after tax rate of return for Deer Valley is 8%, & income tax rate is 40%, and the MACRS recovery period is 10 years. Compute the after-tax NPV of new lift & advise managers if it will be profitable. why or why not? & show calculations.
3. What subjective factors would affect the investment decision??