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
|
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