Responsibility Centers & Financial Controls – (Deer Valley Lodge)

Deer Valley Lodge, a skiresort in the Wasatch Mountains of Utah, has plans to eventually add five newchairlifts. Suppose that one lift costs $2 million, and preparing the slope andinstalling the lift costs another $1.3 million. The lift will allow 300additional skiers on the slopes, but there are only 40 days a year when theextra capacity will be needed. (Assume that Deer Valley Lodge will sell all 300lift tickets on those 40 days.) Running the new lift will cost $500 a day forthe entire 200 days the lodge is open. Assume that the lift tickets at DeerValley cost $55 a day. The new lift has an economic life of 20 years.

Assume that the before-tax required rate of return for Deer Valley is 14%. Compute thebefore-tax NPV of the new lift and advise the managers of Deer Valley aboutwhether adding the lift will be a profitable investment. Show calculations tosupport your answer.

Assume that the after-tax required rate of return for Deer Valley is 8%, the income tax rate is 40%, andthe MACRS recovery period is 10 years. Compute the after-tax NPV of the newlift and advise the managers of Deer Valley about whether adding the lift willbe a profitable investment. Show calculations to support your answer.

What subjective factors would affect the investment decision?