Responsibility Centers & Financial Controls - (Deer Valley Lodge)

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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 Valley Lodge 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?

 

    • 11 years ago
    Responsibility Centers & Financial Controls - (Deer Valley Lodge)
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