Before-Tax NPV of the New Lift and advise Deer Valley’s management

Calculate the Before-Tax NPV of the New Lift and advise Deer Valley’s management on whether adding the lift will be a profitable investment. Display calculations that back up your response.

Initial investment is the cost of the lifts plus the cost of installation.

The cost of the lifts is $ 2000,000.

Installation cost = $ 1300000

As a result, the total initial investment equals $2000000 + $1300000 = $3300000.

Yearly income inflow = 300 skiers x 40 days x $55 per skier per day = $66000

Yearly cash outflow = $500 per day multiplied by 200 days = $100,000

Cash flow present value = ($ 660000 - $ 100000) x 6.623 = $ 3708880

Net present value = $3708880 - $ 3300000

= $ 408880

The net present value shows a very good return and therefore, this is a good investment for Deer Valley Lodge

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.

Cash flow after tax = ($ 660000 - $ 100000undefined) x 0.6

= $ 336000

Present value of cash flow at 8 % = $ 336000 x 9.818

= $ 3,298,848

Present value of tax savings = $3300000 x 0.4 x 0.7059 = $931788 (Whittington and Delaney)

Net present value after tax= ($ 3,298,848+$931788) - $3300000

= $930636

Therefore, investing in ski lifts is more profitable after taxation. Generally, in both situations, investing in the project will be profitable for the Deer Valley Lodge.

What Subjective Factors would Affect the Investment Decision?

Poor weather will affect the investment and especially in cases where the snow is not enough.

The profit that will be earned from the sale of foodstuffs and other items as a result of an influx of extra skiers

Customer satisfaction due to reduction the waiting time for elevators

Work Cited

Ray Whittington and Patrick R. Delaney. Wiley CPA Exam Review 2008: Business Environment and Concepts. New Jersey: John Wiley and sons, 2008. 253 - 256.