Question

In: Finance

A ski resort wants to expand by opening more trails and adding a new high-speed chair...

A ski resort wants to expand by opening more trails and adding a new high-speed chair lift. The initial capital investment for the expansion is $150,000 in year 0 and the resort will not benefit financially until after the project is completed in year 3. After that the annual net benefits will be $20,000 at the end of each year. Assume a lifetime of 25 years for the expansion.
a) Is this investment NPV positive under a 5% discount rate? Under a 13% discount rate?
Note: You may use computer software for your calculation. If you do, please print out the NPV of each year’s annual benefit under each discount rate (i.e., two columns of NPVs). Please be sure to state any assumptions you make.
b) The resort invests in the expansion but ownership decides to sell five years later. Does this affect the NPV analysis? Why or why not? Please state your assumptions. Hint: You do not need to complete another quantitative analysis, and there is more than one right answer.

Solutions

Expert Solution

a:

The investment is positive at 5% than at 13% rate.

Year Cash flows DCF 5% DCF 13%
0 -150000 -150000 -150000
1 0 0
2 0 0
3 0 0
4 20000 16454.05 12266.37
5 20000 15670.52 10855.2
6 20000 14924.31 9606.371
7 20000 14213.63 8501.213
8 20000 13536.79 7523.197
9 20000 12892.18 6657.697
10 20000 12278.27 5891.767
11 20000 11693.59 5213.953
12 20000 11136.75 4614.118
13 20000 10606.43 4083.29
14 20000 10101.36 3613.531
15 20000 9620.342 3197.815
16 20000 9162.23 2829.925
17 20000 8725.934 2504.358
18 20000 8310.413 2216.246
19 20000 7914.679 1961.28
20 20000 7537.79 1735.646
21 20000 7178.847 1535.97
22 20000 6836.997 1359.265
23 20000 6511.426 1202.89
24 20000 6201.358 1064.504
25 20000 5906.055 942.0391
NPV at 5% 77413.93
NPV at 13% -50623.4

b: The cash flows derived on sale would be taken into consideration for this purpose. Suppose the amount received on sale is high, the NPV may be positive after 5 years and it would still be worthwhile to undertake the project. If the amount received on sale is low, it may turn the NPV negative.

WORKINGS

jeff jeffy answered 1 year ago
Next > < Previous

Related Solutions

The Blue Sky Ski Resort plans to install a new chair lift. Construction is estimated to...
The Blue Sky Ski Resort plans to install a new chair lift. Construction is estimated to require an immediate outlay of $210,000. The life of the lift is estimated to be fifteen years with a salvage value of $70,000. Cost of clearing and grooming the new area is expected to be $20,000 for each of the first three years of operation. Net cash inflows from the lift are expected to be $39,000 for each of the first five years and...
Suppose Mayco wants to replace an existing printer with a new high-speed copier. The existing printer...
Suppose Mayco wants to replace an existing printer with a new high-speed copier. The existing printer was purchased 7 years ago at a cost of $21,000. The printer is being depreciated using straight-line basis assuming a useful life of 12 years and no salvage value. If the existing printer is not replaced, it will have zero market value at the end of its useful life. The new high-speed copier can be purchased for $25,000 (including freight and installation). Over its...
1)  Cy-Ski Unlimited Inc. wants to launch a new line of ski jackets for their winter collection....
1)  Cy-Ski Unlimited Inc. wants to launch a new line of ski jackets for their winter collection. The jackets are expected to sell at a price of $ 200 each. You can procure these jackets from a contract manufacturer overseas. You have estimated the total landed cost of men’s and women’s jackets will be $175 and $160 per unit respectively. You estimate fixed costs to be $ 260,000 (contract setup, ongoing monitoring, specialized equipment for your product, etc.). a) If you...
XYZ wants to expand its operations by adding another product, which will be a 5-years project...
XYZ wants to expand its operations by adding another product, which will be a 5-years project with an investment cost of $115,000. If XYZ borrowed $115,000 at a yearly interest rate of 12% for 6 years, generate the loan amortization table (starting balance, interest payment, principal payment, ending balance) if they want to pay off the loan at the end of year 5. Show your calculations.
Snowbowl Resorts wants to create more snowmaking capacity on their ski mountain. This increase in capacity...
Snowbowl Resorts wants to create more snowmaking capacity on their ski mountain. This increase in capacity requires the purchase of additional snow-making equipment that will cost $697,000. Based on input from the Accounting Department, this would be depreciated on a straight-line basis to zero over the 5-year life of this new snowmaking project. When the project is over, the equipment can be sold for $192,000. There is a need for additional net working capital at the beginning of the project...
The owner of Genuine Subs, Inc., hopes to expand the present operation by adding one new...
The owner of Genuine Subs, Inc., hopes to expand the present operation by adding one new outlet. She has studied three locations. Each would have the same labor and materials costs (food, serving containers, napkins, etc.) of $1.90 per sandwich. Sandwiches sell for $2.70 each in all locations. Rent and equipment costs would be $5,400 per month for location A, $5,700 per month for location B, and $5,950 per month for location C. a. Determine the volume necessary at each...
Net Present Value: The Lees are considering adding a new piece of equipment that will speed...
Net Present Value: The Lees are considering adding a new piece of equipment that will speed up the process of building the bobbleheads. The cost of the piece of equipment is $42000. It is expected that the new piece of equipment will lead to cash flows of $17000, $29000, and $40000 over the next 3 years. If the appropriate discount rate is 12%, what is the NPV of this investment? Explain the findings. I need the excel answer please.
A company is developing a new high performance wax for cross country ski racing. In order...
A company is developing a new high performance wax for cross country ski racing. In order to justify the price marketing​ wants, the wax needs to be very fast.​Specifically, the mean time to finish their standard test course should be less than 55 seconds for a former Olympic champion. To test​ it, the champion will ski the course 8 times. The​ champion's times​ (selected at​ random) are 51.4, 63.3​, 51.2, 54.3​,49.4,49.4,50.8,and 40.3 seconds to complete the test course. Should they...
A company is developing a new high performance wax for cross country ski racing. In order...
A company is developing a new high performance wax for cross country ski racing. In order to justify the price marketing​ wants, the wax needs to be very fast.​ Specifically, the mean time to finish their standard test course should be less than 55 seconds for a former Olympic champion. To test​ it, the champion will ski the course 8 times. The​ champion's times​ (selected at​ random) are 56.4, 60.4​, 48.548.5​, 53.3, 49.9, 46.9, 53.7​, and 42.1 seconds to complete...
A company is developing a new high-performance wax for cross country ski racing. In order to...
A company is developing a new high-performance wax for cross country ski racing. In order to justify the price marketing wants, the wax needs to be very fast. Specifically, the mean time to finish their standard test course should be less than 55 seconds for a former Olympic champion. To test it, the champion will ski the course 8 times. The champion's time (selected at random) 57.7, 63.9, 50.5, 50.5,48.8, 45.9, 54.2, and 42.3 seconds to complete the test course....
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT