Question

A corporation operates snow sports facilities in Canada. The corporation has an opportunity to lease a location in the mountains for 10 years for $60,000 per year to open a new snow sports location. They will also have access to trails in the provincial park at an additional cost of $24,000 per year for trail maintenance. To secure the lease they paid a non-refundable deposit of $10,000 last year. The corporation will be required to purchase snowshoes, cross-country skis and other equipment for an estimated amount of $275,000. The equipment is depreciated on a straight-line basis over 10 years. They also estimate that they will need to spend $25,000 to renovate the interior of the building at the start of the lease. In addition, management has provided the following information regarding the expected future annual earnings and expenses of the new project:

- Cross country ski rentals – 6,000 rentals per year at $20 - Snow shoe rentals – 3,000 rentals per year at $10        - Trail tickets – 12,000 tickets per year at $15 - Other incremental fixed costs - $144,000 per year (excluding depreciation and lease costs)

The appropriate discount rate for the project is 10%. Ignore taxes.

Calculate the annual incremental operating cash flow of the project using the year 1-10 cash flows only.

Incremental annual revenue = ?

Incremental annual costs = ?

Incremental annual operating cash flow = ?

NPV = ?

Answer 1

Revenue per year = 6000*20 + 3000*10 + 12000*15

= $330,000

Depreciation has no role in cah flow beacuse there is no tax in the question.

Particulars	Years 1-10
Incremental annual reveue (A)	330,000
Lease cost	60,000
Additional cost	24,000
Other incremental fixed cost	144,000
Incremental annual cost (B)	228,000
Incremental annual operating cash flow (A)-(B)	102,000

Year 0 cash flows = Purchase cost +Renovation cost

= 275,000 + 25,000

= $300,000

Year	Cash flows	PVAF@10%	Present value of cash flows
0	(300,000)	1	(300,000)
1-10	102,000	6.1446	626,746
Net present value	326,746