Consider the following scenario:
Dear 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 life costs ae will 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 is needed. (assume the 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 lodge cost $55 as 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 life 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 NP of the new life and advise the mangers of DEER Valley about whether adding the life will be profitable invesment. show calculations to support your answer
3. What subjective factors would affect the investment decisions?