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Deer Valley Lodge, a ski area near Salt Lake City,...

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Question

Deer Valley Lodge, a ski area near Salt Lake City, has plans to eventually add five new chairlifts. Suppose that one of the lifts costs $2.2 million and preparing the slope and installing the lift cost another $1.48 million. The lift will allow 300 additional skiers on the slopes, but there are only 40 days a year when the lodge needs the extra capacity. (Assume Deer Valley 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 lift tickets at Deer Valley cost $65 a day and added cash expenses for each skier day are $9. 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. 2) Assume that the after-tax required rate of return for Deer Valley is 8%, the income tax rate is 40%, advise the managers of Deer Valley about whether adding the lift will be profitable investment. 3) What subjective factors would affect the investment decision?

 

Paper#11198 | Written in 18-Jul-2015

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