Deer Valley Lodge Essay

1018 Words Feb 21st, 2007 5 Pages
1. I am asked to compute the before-tax Net Present Value or NPV of a new ski lift for Deer Valley Lodge and advise the management there of the profitability. Before I am able to make this calculation there are a few calculations that I will need to make first. First the total amount of the investment, this will be the cost of a lift itself $2 million plus the cost of preparing the slope and installing the lift $1.3 million. Thus the investment amount for one lift is $3.3 million.

Next I will need to find out the yearly net income from the investment. This will be gross ticket sales minus the total expenses. Deer Valley expects 300 skiers per day for 40 days at $55.00 per ticket, giving us $660,000 in ticket sales. In order to
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Our income tax rate is 40% leaving us with 60% of our net yearly income. Our net yearly income is $500,000 by multiplying that times 60%, our percentage that we will have left after taxes, we end up with $300,000.

Our rate of return will drop to 8% since we will be expecting a lower rate of return after taxes. The NPV factor for 20 years @ 8% is 9.8181. By multiplying the NPV factor of 9.8181 times our after tax annuity of $300,000 we have a NPV of $2,945,430.00 for our after tax net income.

Next I need to find the NPV of the tax savings from the depreciation of the investment. The amount of money that we save on taxes will be the amount of the deduction times the tax rate. I will be able to deduct the total investment over 10 years as depreciation. To find the tax savings on the investment I multiply the investment amount of $3.3 million times the tax rate of 40% to find the tax savings of $1,320,000.00. I then multiply the tax savings times the NPV factor of .7059, the discount rate of 8% at 10 years, to find $931,788.00, the NPV of the tax savings.

Now to find the total NPV of the after-tax income I add the NPV of the tax savings $931,788 to the NPV of the after-tax net income $2,945,430 giving us $3,877,218.00. When compared to the $3.3 million investment it looks like we have a profit of $577,218.00 making this a good investment.

3. The figures in the first two answers are purely

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