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Use the information provided in the case and calculate the weighted average cost of capital for Arizona Snowbowl.
a.Use the information provided in the case and calculate the weighted average cost of capital for Arizona Snowbowl.
b.e.Do you believe the weighted average cost of capital you calculated in part d accurately reflects Snowbowl’s WACC? If so, why? If not, explain why not and give your estimate of Snowbowl’s actual WACC. Justify your answer
c.Generate depreciation schedules for the EIS and for the remaining investment required for the project.
d.Calculate ‘base case’ cash flows resulting from the project for each of the next 10 years (disregarding the uncertainty associated with regulatory approval and any judicial proceedings). Use the following assumptions: The anticipated increase in skier days occurs immediately upon completion of the project, beginning in 2006.
e) Calculate the net present value of the project based on the “base case” cashflows from question 7 and your estimate of the WACC from question 5 part (b).
f) Do a sensitivity analysis of the project by allowing the following inputs tovary +/- 10 percent and calculating the resulting effect on NPV (Change one variable at atime resulting in 6 different NPV estimates):a. WACCb. The increase in the number of skier/snowtuber visitsc. Growth rate beyond year 10
g) As pointed out in the case, there is a significant possibility that, even if theSnowbowl prepares the EIS and applies for regulatory approval, it will be denied by theUSFS, or by the courts in which case the Snowbowl would spend $750,000 for the EISand get no return (10% probability). Calculate the expected NPV of the project if theprobability that the project will be approved is 90%. For this calculation, use the “basecase” cash flows developed in response to question 7, and your estimate of the cost ofcapital from question 5 (b).Note: Calculate NPV of EIS alone: spend $750,000 and get depreciation taxshields only.
