Posted: July 10th, 2016

What subjective factors would affect the investment decision?

Deer Valley Lodge, a ski area near Salt Lake City, has plans to eventually add five new chairlifts. Suppose that one of the lifts costs $2.2 million, and preparing the slope and installing the lift costs another $1.48 million. The lift will allow 300 additional skiers on the slopes, but there are only 40 days a year when the lodge needs the extra capacity. (Assume that Deer Valley 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 lift tickets at Deer Valley cost $65 a day and added cash expenses for each skier-day are $9. The new lift has an economic life of 20 years.

1. 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.

2. Assume that the after-tax required rate of return for Deer Valley is 8%, the income
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.

3. What subjective factors would affect the investment decision?