Question

In 2014 Vail Resorts, Inc. (MTN), purchased Park City Mountain Resort for $182.5 million. Vail also announced it would invest another $115 million for resort upgrades, which included $50 million to link the Park City Mountain Resort to Vail's neighboring Canyons Resort. This would create one of the largest ski resorts in the United States, with over 7,000 acres of skiable terrain.

Interestingly, the opportunity to purchase Park City Mountain Resort arose because the previous owners missed the deadline to renew their 20-year lease of the property by two days. The unexpected option to purchase the resort led top management to engage in capital budgeting analysis to see if the massive expenditure necessary for the purchase and upgrade of the Park City Mountain Resort would pay off.

Instructions

1. What estimates would be needed for Vail to perform a net present value analysis of whether to buy the Park City Mountain Resort?

2. What uncertainties would Vail have to consider about these estimates?

3. What metrics are available to external stakeholders for use in assessing Vail's capital budgeting decisions?

Note: use proper citations when necessary.

Answer 1

Solution

1)

Net Present Value Analysis: Net Present Value is the difference between the sum of the present value of cash inflows and the sum of present values of cash outflows of a business entity.

NPV is a technique as a part of capital budgeting metrics and aims to ascertain the financial strength of a business or a project at a given period of time.

The following are estimates Vail would need to perform the net present value analysis :

1. Cash inflow from the Park City Mountain Resort: The expected cash inflows from the mountain sources such as Ski school, dining, lift, etc and from lodging sources.
2. Cash outflow from the Park City Mountain Resort: The expected cash outflows from the Park City Resort such as labor expenses, cost of raw material.
3. Discount rate from Park City Mountain Resort: The rate is obtained taking into account the return of investment with a similar risk of running a resort.

2)

Vail resort will have to consider the following uncertainties about these estimates :

1. Volatile weather: The resort cash flows are directly proportional to the kind of weather the area experiences. In the case of rains, the resorts will have lesser customers.
2. Seasonal revenues: The resort is a ski resort and as a result, the revenues would be seasonal i.e. mostly restricted to the winter seasons only.
3. Season passes: Vail usually launches seasons passes and the cash flows during those times increase substantially. As a result, the launch of season passes is also uncertain.

3)

The following metrics are available to external stakeholders for use in assessing Vail’s capital budgeting decision :

Companies use various methods to determine the effectiveness of investing in capital expenditure assignments. The company should consider the following metrics usually to validate the capital budgeting decision they make. These are usually the time value of money and the cash flows expected in the future from the investment and the uncertainty related to those cash flows.

In context with purchasing the Park City Mountain resort the following metrics should be considered :

1. Net Present of the Vail resorts i.e. cash inflow and outflow and the investment outlay
2. Internal rate of return of the existing Vail resorts i.e. the rate of return at which NPV is 0
3. Debt/Equity used for the investment: If the project is being funded through debt or equity or both. Higher debt would mean more cash outflows.
4. Existing assets of the Vail resorts: The existing value of the assets and the ability to generate cash flows in the future.