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April 29, 2016

# Homework Help: Management accounting

Posted by please help !!! on Monday, May 28, 2007 at 11:39am.

Suppose one chairlift costs \$2 million now you have to install the lift for \$1.3 million, this lift allows 300 skiers on the slopes,for 40 days out of a year, running it costs \$500 a day for the 200 days that it is open, now suppose the lift tickets cost \$55 a day and cash expenses for each skier-a-day \$5, with that said the chairlift has an economic life expectancy of 20 years.
1. Assume before-tac required of return for the resort is 14%, then compute the before-tax NPV of the new lift and advise the manager to accept or reject the investment.
2. Assume after-tax required return is 8%, the income tax rate is 40% and the MACRS recovery period of 10 years, now compute the after-tax NPV of the new lift again tell the manager whether to accept or reject the offer.
3. What subjective factors would affect the investment decision?

First work out how much the installed chairlift would actually cost, including taxes, licenses, permits, daily cost to run, etc.

Then work out how much you would make assuming that you can fill the seats every day during the season. Work out how much that amount would mean per day for the whole year (you have to pay the loan even in the summer.

Then decide if this is a good idea or not. Also assume average weather conditions. A heavy snow year may yield more money, a light one less.

Figure in a fudge factor to take care of the inevitable catastrophes -- breakdowns, bad weather (no snow), employee problems, war, avalanche, etc.

After that, it's a simple math problem using the right formula.

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