Essay on Q Analysis

611 Words Nov 10th, 2014 3 Pages
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 park 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.

Assume that the before-tax required rate of return for Deer Valley is 14%. Compute the before-tax NPV of the new lift
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Question 2.
After tax cash flow = $560,000.00 x (1-0.4)
= 0.6 x $560,000.00 = $336,000.00
PV of after tax cash flow @8% = $336,000.00 x 9.8181= $3,298,882.00
Profit tax savings = $3,300,000.00 x .4 x .705923 = $931,819.00
Net after tax = $3,298,882.00 + $931,819.00 - $3,300,000.00 = $930,701.00

The investment on the lift will be more profitable in an after tax basis versus the pretax basis.

Question 3.
The factors that I will see as subjective that can affect the decision are as follows:

• If bad weather occurs then the estimated amount of skiers expected to come to Deer Valley Lodge can be less than estimated amount.
• Even if the additional lift make customers more happy and satisfied that does not guarantee that more skiers will be attracted into coming to Deer Valley Lodge.
• If additional skiers visit though profits can rise because more food will be purchased and more equipment will be rented from the additional customers and if no more additional customers come there can be a drop in the rental of equipment and purchase of food and that can result in less or no

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