Posted: March 6th, 2014

Deer Valley Lodge, a ski resort in the Wasatch Mountains of Uta, has plans to eventually add 5 new chairlifts.

Consider the following scenario:

Deer Valley Lodge, a ski resort in the Wasatch Mountains of Uta, has plans to eventually add 5 new chairlifts.  Suppose that 1 lift costs $2 milion, 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 Lodge cost $55 a day. The new lift has an economic lfe of 20 years.

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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 whrther adding the ift 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 MARCS 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 sbjective factors would affect the investment decision?

You can view a present value table here.

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