Please explain how the highlighted question in the attached document (all of the steps in solving the ROR incremental investment in business activity) was calculated etc. Thank you!
What is the rate of return (after tax) on ABC's incremental investment in business activity? (Hint: because the benefit of the investment is ongoing, per annum, indefinitely into the future, the investment return is the increment to the firm's after tax and after depreciation EBITDA, that is, the increment to after tax net operating income, divided by the increment to invested capital, which is the increment to trade capital plus capital expenditure).
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For continuing and ongoing per annum benefits for a business investment, incremental rate of return is the increment to after tax and after depreciation EBITDA (which is Net Operating Income) divided by the increment to investment capital. The increment to NOI is the gross margin ...
The rate of return and incremental investments are analyzed. A firm's after tax and depreciation EBITDA is given.
Deer Valley Lodge: NPV, rate of return, MACRS, after-tax NPV, investment decision
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.
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?