# Deer Valley Lodge -Responsibility Center & Financial Control

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.

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 whether adding the lift 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 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.

3. What subjective factors would affect the investment decision?

Please follow these directions:

1. Need to calculate the amount of the investment that the company will be making in this project.

2. Calculate the gross sales that the company will realize from the sell of tickets to the additional customers each year.

3. Calculate the yearly expenses that the company will have for this lift.

4. Calculate the amount of net cash inflow (net income) that the company will realize each year. This will be the amount from the sell of tickets (question 2) minus the expenses for the project (question 3) Do not multiply by 20. The net present value will be determined by using the yearly amount.

5. Compute the net present value of the before tax net cash inflow (net income).

a. Based on this information, is this a good investment?

6. This question requires three steps.

a. Determine the after tax net cash flow (net income)?

i. Determine the NPV of the after tax net cash flow (net income)?

b. Determine the tax savings from the investment. (hint: This is based on the amount of the investment).

i. Determine the NPV of the tax savings.

c. Add the NPV of the after tax net cash flow (net income) from 6-a to the NPV of the tax savings from 6-b. This is the total after tax NPV.

d. Based on this information is this a good investment?

7. What are the subjective factors that will influence our decision? What will affect our decision other than the calculations we have made above? Remember, the above calculations are based on estimates. What may affect these estimates in a good or bad way?

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