HW-1091 Deer Valley Lodge

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.
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.
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.
What subjective factors would affect the
investment decision?

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