Deer Valley Lodge, a ski resort in the Wasatch Mountains of Utah, has plans to eventually add five new chairlifts.

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Description

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?

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