 QUESTION

# managerial accounting

Consider the following scenario:

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.

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. Show calculations to support your answer.
2. 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.
3. What subjective factors would affect the investment decision?

You can view a present value table here.

Unit 5 Individual Project

For the Deer Valley assignment we need to use Chapter 11 as your guide.  I suggest if you are comfortable in Microsoft Office that you do the IP in Excel using "text boxes" select the Insert menu then click on the Text box icon on the ribbon that looks like a sheet of paper with an A on it and draw the "text box" on the worksheet.  If you are using Excel for this assignment see pages 415-6.

For Q1) you need to calculate the annual costs and then the annual revenues for one new lift - you do not need to do calculations for five lifts as each is exactly the same.  For Q1 you need to calculate the revenues from one new lift and then the extra expenses for it.  Subtract the expenses from the revenues as shown on pages 406-409 to get the net annual cash flows.  FYI the PV factors are at the end of the textbook in Appendix B on either pages B10 or B11.

For Q2) you need to re-calculate the investment using a different rate of return and tax effects and depreciation.

Finally do not forget Q3 the "subjective"= factors to consider - these are other benefits for getting more skiers at Deer Valley.   For example, what other benefits besides higher ticket revenues sales do the Red Sox get by selling out Fenway Park all the time?

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