This is the assignment
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?
These were he steps the instructor posted
4. 1st step: calculate the investment:
5. 2nd step: Determine the annual cash inflows
6. 3rd step: Determine the annual cash outflow
7. 4th step: Calculate the annual cash inflow minus the annual cash outflow
8. 5th step: Calculate the present value of the profit (used table 2 page A13 in appendix B)
9. 6th step: Net present value (The present value of the profit minus the investment.)
10. Part 2
11. 1st step: after tax cash flows
12. 2nd step: calculate the present of the tax savings (used exhibit 11.7 pg 491)
13. 3rd step: Calculate the net present value of the after tax
I think the investment is $3.4M but am having trouble on the cash inflows