Question

Capital Budgeting Problem: Fatbiking

(Excel Project)

A Nordic ski area is considering purchase of 5 Fatbikes to diversify its winter offerings given the variable snow conditions in the Northeast. Consider the following:

1. The life of the project is 5 years since the ski area’s land lease ends in 5 years.

2. The cost of the Fatbikes is $1,500 per bike. It will cost an additional $100 per bike to repaint with colors and logo of the Nordic area.

3. The Nordic area must also maintain a $1000 inventory of spare tires and other parts while fatbiking is offered. Once the land lease ends at the end of 5 years, the area will no longer maintain this inventory.

4. The Nordic area expects to rent the fatbikes, and estimates a total increase in revenue of $600 a month for the four month winter season.

5) If the Nordic area buys the fatbikes, it expects to incur additional labor costs related to bike maintenance, estimated at $100 per month for the four month winter season.

6) The fatbikes will be depreciated on a 5 year MACRS basis. The depreciation percentages for the 5 years, respectively, will be 20%, 32%, 19%, 12% and 11%.

7) The ski area will store the bikes in a shed built last year for $5,000.

8) At the end of the 5 years, the ski area expects to be able to sell the fatbikes to other Nordic ski areas for $500 per bike.

9) The federal plus state tax rate is 25%. The capital gains tax rate is 15%.

10) The ski area uses a WACC of 10% to evaluate projects.

A) Using Excel and Excel formulas in all appropriate cells, generate the incremental, after-tax cash flows and calculate the NPV of this project. Make a recommendation whether the Nordic area should or should not buy the fatbikes.

B) If the WACC increases to 12%, should the ski area still buy the Fatbikes?

C) Conduct a sensitivity analysis assuming the following changes in assumptions. Decide whether the project would make financial sense, assuming WACC of 8%, 10% and 12%.

1) The fatbikes cost $1,700 each.

2) The cost to paint the bikes is $150 per bike.

3) Projected additional revenue is $550 per month for the 4 month winter season.

4) Pre-tax operating costs for labor will be 15% higher than projected.

5) The ski area can sell the fatbikes for $900 each at the end of 5 years.

Answer 1