Deervalley

First work out how much the installed chairlift would actually cost, including taxes, licenses, permits, daily cost to run, etc.

Then work out how much you would make assuming that you can fill the seats every day during the season. Work out how much that amount would mean per day for the whole year (you have to pay the loan even in the summer.

Then decide if this is a good idea or not. Also assume average weather conditions. A heavy snow year may yield more money, a light one less.

Figure in a fudge factor to take care of the inevitable catastrophes -- breakdowns, bad weather (no snow), employee problems, war, avalanche, etc.

An Excel spreadsheet is very helpful for these kinds of questions. Plug in what you know. The capital cost is $3.3 million. The net increase revenue stream is 40*300*(55-5) = $0.6 million for 20 years. Discount the first year by 1.14, the second year by 1.14^2, and so on. Add discounted revenues to get the NPV of all future revenues. Compare this to $3.3 million to see if the lift is a profitable investment.

2) Taxes complicate the problem, but do not change the basic nature of the problem. Instead of a 14% discount rate, use an 8% rate. Second, convert the revenue stream to and after-tax stream. Using straight line depreciation, the Lodge would get a $0.33 deduction for the first 10 years. So year 1 after tax revenue is (1-.4)*(0.6-.33)=$.162 million. Deflate this by 1.08. Repeat for 9 more years, at which time the depreciation deduction goes away. But keep going for another 10 years.

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

This solution is comprised of a detailed explanation to compute the before-tax NVP of the new lift and advise the managers of Deer Valley about whether adding...