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.

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Expert Solution

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

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