Deer Valley Lodge Problem
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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 and the added cash expenses for each skier-day are $5. 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.
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.
What subjective factors would affect the investment decision?
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Solution Summary
The solution includes a word and an excel files that explain step by step how to work out the Deer Valley Lodge problem. The case tackles the concepts of Net Present Value, MACRS Depreciation as well as subjective factors that can affect an investment decision.
Solution Preview
This is a common problem, i would recommend that you read the answers and re-write them in your own words so that you present an original solution. Please check the attached for a step by step solution.
1)The Before-Tax NPV is $806,340.94 per lift (excel sheet attached). Since the ...
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