Thursday, January 30, 2020
Deer Valley Lodge Project Essay Example for Free
Deer Valley Lodge Project Essay The purpose of this unit 5 individual project is to take into consideration the revamping project associated with Deer Valley Lodge. The ski resort has made plans to add to the already sprawling location and wish to determine whether based on tax and cost information, if the new improvements are of an advantage or a disadvantage to the company as a whole. ? Deer Valley Lodge Deer Valley Lodge is a ski resort that has plans to add five new chairlifts to their site. The costs/interest to the company per chairlift is as follows: Ã¢â¬ ¢Lift Costs $2 Million Ã¢â¬ ¢Preparation of slope and installation costs $1. 3 Million Ã¢â¬ ¢300 additional skiers if built Ã¢â¬ ¢ONLY 40 days a year when the extra room for skiers will be needed. Ã¢â¬ ¢New lifts will cost $500. 00 per day for 200 days Ã¢â¬ ¢Tickets cost $55. 00 per day Ã¢â¬ ¢New lift has an economic life of 20 years The above figures are very important when taking into prospective the planning and implementation of the planning for future extensions. Based on this knowledge, this exercise will call for explanation of the following information in this paper: 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? Computing Revenue and Cost Based on the previously listed figures it is safe to assume that the below figures will show the appropriate yield given the costs associated with the building of the new lift. Figuring the Incremental revenue and cost is of importance to complete this exercise. Incremental Revenue: $55. 00 per day (X) multiplied by the extra intended tickets which is 300 (X) then multiplied by the intended 40 day usage brings the total revenue cost to 660,000. 00, while Incremental cost is the lift costs of $500/per day multiplied by the total amount of days in service which is 200, which will bring the cost to 100,000. Then you take into prospective the Profit which is the difference of the Incremental revenue and the Incremental costs which in turn is 560,000. If this is the case then it is understood that the before-tax cash flow is as follows: 1. Initial year: 3,300,000 2. Every year after: 560,000 These figures are important when determining the factors that will suggest that the building of the new lift is of the utmost importance. Computing the before-tax NPV of the new lift: Will it be profitable Due to the NPV being a positive number listed in the above calculations it is my belief and will be the advantage of the company in question to go ahead with the project and expect a great return for their efforts.