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December 19, 2014

Homework Help: Management Accounting

Posted by Charlotte Holmes on Wednesday, May 23, 2007 at 10:26pm.

Deer Valley Lodge, a ski resort in the Wasatch Mountains of Utah, has plans to eventually add five new chair lifts. 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 that 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 and the added cash expenses for each skier-day are $5. The new lift has an economic life of 20 year.
1.What if 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 adding the lift to be a profitable investment
2. What if 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 adding the lift will be profitable investment.
3. What subjective factors would affect the investment decision?

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