suppose one chairlift costs $2 million and the slopes and the lift had to be install for $1.3 million, and the lift let 300 skiers on the slopes, for 40 days out of a year) Running the lift cost $500 a day for 200 days for the ski resort openings, now suppose the lift tickets cost $55 a day and the cash expenses for each skier-day are $5. the chairlift has an economic life span of 20 years

1. Assume before-tax required of return for the resort is 14%. Compute the before-tax NPV of the new lift and advise the managers whether to add the lift as a profitable investment.
2. Assume after-tax required of return is 8% , the income tax rate is 40% and the MACRS recovery period is 10 years. Compute after-tax NPV of the new lift and tell managers whether to add as a profitable investment.
3. Wht subjective factors would affect the investment decision?

see my post to your earlier post.

To compute the NPV (Net Present Value) for the new lift and determine whether it is a profitable investment, we need to calculate the cash flows and discount them to present value. Let's break it down step by step.

1. Before-Tax NPV Calculation:
a. Calculate the initial cash outflow for the lift: $2 million (cost of the chairlift) + $1.3 million (cost of slopes and lift installation) = $3.3 million.
b. Determine the annual cash inflow: 300 skiers/day * $55/day (ticket price) * 40 days = $660,000.
c. Calculate the annual cash outflow: $500/day (running cost) * 200 days = $100,000.
d. Calculate the annual net cash flow: $660,000 - $100,000 = $560,000.
e. Determine the economic life span of the lift: 20 years.
f. Calculate the before-tax NPV using the required rate of return of 14%:
NPV = -Initial Investment + (Annual Cash Inflow - Annual Cash Outflow) * (1 - (1 + r)^(-t)) / r
Where r = required rate of return and t = number of years.
Plugging in the values: NPV = -$3.3 million + ($560,000 * (1 - (1 + 0.14)^(-20)) / 0.14

2. After-Tax NPV Calculation:
a. Calculate the after-tax annual net cash flow: $560,000 * (1 - 0.4) = $336,000 (considering a 40% income tax rate).
b. Calculate the after-tax NPV using the required rate of return of 8%:
NPV = -$3.3 million + ($336,000 * (1 - (1 + 0.08)^(-20)) / 0.08)

3. Subjective Factors:
In addition to financial calculations, there are subjective factors that would affect the investment decision, such as:
- Market demand for skiing and potential growth in the industry
- Competition from other ski resorts
- Overall economic conditions and consumer spending patterns
- Long-term maintenance and operational costs of the lift
- Environmental impacts and permits required
- Overall strategic fit with the resort's goals and positioning

By evaluating the before-tax and after-tax NPV values and considering these subjective factors, the managers can determine whether adding the lift is a profitable investment for the ski resort.