Deer Valley Lodge

Deer Valley Lodge

Adrienne Saulsberry

AIU-Atlanta

08/23/2015

Abstract

For this assignment I was asked to answer the following questions using the data in the explanation of the assignment: 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. 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. What are subjective factors that would affect the investment decision?

Introduction

        The Deer Valley Lodge wants to decide whether to add another lift to the park. The issue is they want to see if it will be profitable or not. The new lift will cost $2 million dollars and it will cost $1.3 million dollars to install it. Not only will that it allow 300 more skiers to ride the lift in the lodge but there are only 40 days a year when the extra capacity will be needed. For this project we have to assume that the Lodge will sell all 300 lift tickets on those 40 days, if all the ticket are sold then it will cost $500 a day for the entire 200 days the lodge is open . We have to calculate the tax NPV for the new lift and advising the managers of Deer Valley about if it’s a good or bad idea to add the lift. Once the first part is finished it’s followed by changing the tax required rate 40 and MARCS recovery period is 10 years.

Problem 1

        To find the investment we have to at the price per lift and the how much it will cost to install the lift (2,000,000 + 1,300,000 = 3,300,000). After we found the investment now we had to find the yearly cash inflow which you multiply the number of tickets, days, and the price (300*40*55=660,000). The yearly cash outflow can now be calculated by multiplying the cost of running the lift and the days it will be open (500*200=100,000). Next we can find out the net cash flow by subtracting the yearly cash inflow and outflow (660,000-100,000=560,000). Using the chart the present factor for 14% is 6.623130552 (Wild & Shaw, 2014). With present value factor you multiply 6.623130552*560,000=3,708,953.11 this equals present value cash flow. Now we can determine the NPV which is $408,953.11 (3,300,000-3,708,953.11). According to these numbers the project is profitable.

Problem 2

        To find the after tax cash inflow we have to multiply the net cash flows times 1 minus the tax rate (560,000*(1-.4) =336,000). Using the chart the present value factor for 8% is 9.818147407(Wild & Shaw, 2014), the present value of after tax is $3,298,897.53 and the present value of tax savings is $936,540. The NPV after tax is $935,437.53, even after taxes the lift is still profitable.

Conclusion

        Some subjective factors that can influence this is the customers purchasing rental equipment and other this they may want at the Lodge. Another factor is that the customer know they don’t have to wait in long times with additional sky lift making customers more satisfied. Managers use these formulas to help make future decisions on the business. They want to make sure the money they are putting in can keep the business going and produce more sales.