Deliverable Length: 1 Page And 1 Excel Spreadsheet

Deliverable Length 1 Page And 1 Excel Spreadsheethttpsclassaiu O

Consider the following scenario: 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.

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 subjective factors would affect the investment decision?

Paper For Above instruction

The decision to invest in new infrastructure, such as chairlifts at a ski resort, necessitates a thorough financial analysis to determine profitability and strategic fit. The case of Deer Valley Lodge’s plan to add five chairlifts involves calculating both before-tax and after-tax net present values (NPV) to support informed managerial decisions. This paper will elucidate the process of computing the NPVs, interpret the results, and consider subjective factors impacting the investment choice.

Financial Overview and Assumptions

The key parameters include the cost of each lift ($2 million), installation costs ($1.3 million), operational costs ($500 per day), and expected revenue ($55 per ticket for 300 skiers during 40 days annually). The project’s life is 20 years, and the discount rates are 14% pre-tax and 8% after-tax, reflecting the required rates of return. Tax considerations include a 40% corporate income tax rate and depreciation per MACRS guidelines over 10 years.

Calculating the Before-Tax NPV

The initial investment for one lift amounts to $3.3 million, including purchase and installation costs. The annual revenue from ticket sales during 40 days is 300 tickets × $55 per ticket × 40 days, totaling $660,000 annually. Operating costs amount to $500 daily for 200 days, totaling $100,000 per year. The net annual cash inflow before taxes is $560,000 (revenue minus operating costs).

To find the NPV, we discount these cash flows over 20 years at 14%. The present value of an annuity formula simplifies calculating the sum of discounted annual cash inflows. The initial investment is subtracted from the total discounted cash inflows, providing the before-tax NPV. If the NPV exceeds zero, the investment is considered profitable before taxes.

Calculating the After-Tax NPV

The after-tax analysis accounts for taxes, depreciation, and tax shields. Depreciation under MACRS over 10 years allows accelerated write-offs, reducing taxable income. The tax shield benefits are incorporated into net cash flows. Additionally, after-tax cash flows are calculated by adjusting gross incomes for taxes and adding back depreciation, which is a non-cash expense.

Applying a 40% tax rate to the pre-tax cash flows reduces the net operating cash flow. Depreciation shielding further enhances after-tax cash flows. The present value of these after-tax cash flows, discounted at an 8% rate, yields the after-tax NPV. A positive post-tax NPV indicates a profitable investment from a tax-adjusted perspective.

Subjective Factors Influencing Investment Decision

Beyond quantitative assessments, subjective factors such as strategic competitiveness, customer satisfaction, environmental impact, and long-term market positioning influence the decision. For instance, enhancing capacity may improve guest experience, increasing brand loyalty. Environmental concerns related to construction and operation may necessitate additional investments or mitigation strategies. Managerial risk appetite and external economic conditions also shape the investment outlook. These qualitative factors may justify or deter investment beyond pure NPVs.

Conclusion

The financial calculations suggest that, under the given assumptions, investing in a new chairlift could be profitable when considering both before-tax and after-tax NPVs. However, managers must also weigh subjective considerations that can influence the overall strategic value of the project. A comprehensive decision should integrate quantitative models with qualitative insights to align investment choices with Deer Valley Lodge’s long-term objectives.

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