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September 21, 2014

September 21, 2014

Posted by **please help !!!** on Friday, May 25, 2007 at 8:27pm.

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 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 afect the investment decision?

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

- Management Accounting -
**ask**, Sunday, February 7, 2010 at 10:54pmwow

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