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Deer Valley Lodge: NPV and Subjective Factors

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Deer Valley Lodge, a ski area near Salt Lake City, has plans to eventually add five new chairlifts. Suppose that one of the lifts costs $2.2 million, and preparing the slope and installing the lift costs another $1.48 million. The lift will allow 300 additional skiers on the slopes, but there are only 40 days a year when the lodge needs the extra capacity. (Assume that Deer Valley 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 lift tickets at Deer Valley cost $65 a day and added cash expenses for each skier-day are $9. 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.

2. Assume that the after-tax required rate of return for Deer Valley is 8%, the income
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.

3. What subjective factors would affect the investment decision?

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Solution Summary

Your tutorial is in Excel, attached. This shows the NPV before and after tax, of the proposed lift.

Solution Preview

Your tutorial is in Excel, attached. This shows the NPV before and after tax, of the proposed lift.

3.What subjective factors would affect the investment decision?

The subjective factors include the extreme long term nature of the ...

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Carol Sargent, PhD
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  • MSc, University of Virginia
  • PhD, Georgia State University
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