DeerValleyLodge, a ski resort in theWasatchMountainsofUtah, 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 thatDeer parkwill 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 atDeerValleycost $55 a day. The new lift has an economic life of 20 years.
Assume that the before-tax required rate of return forDeerValleyis 14%. Compute the before-tax NPV of the new lift and advise the managers ofDeerValleyabout whether adding the lift will be a profitable investment. Show calculations to support your answer.
Assume that the after-tax required rate of return forDeerValleyis 8%, the income tax rate is 40%,