• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

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

Extracts from this document...


Individual Project Unit Five ACG_420 Managerial Accounting And Organizational Controls July 8, 2006 Introduction Deer Valley Lodge, a ski resort in the Wasatch Mountains of Utah, has plans to eventually add five new chairlifts. Suppose that one lift costs $2 million, and preparing the slope and installing the lift costs another $1.3 million. The lift will allow 300 additional skiers on the slopes, but there are only 40 days a year when the extra capacity will be needed. (Assume that Deer park will sell all 300 lift tickets on those 40 days.) Running the new lift will cost $500 a day for the entire 200 days the lodge is open. Assume that the lift tickets at Deer Valley cost $55 a day and the added cash expenses for each skier-day are $5. The new lift has an economic life of 20 years. 1. Assume that the before-tax required rate of return for Deer Valley is 14%. ...read more.


Part 2: 1. What is the after tax value of net cash flows as determined in question #1? 500,000 - (500,000 * 40%) = $300,000 2. What is the present value of this annuity? (Use table 2) 20 years, 8% $300,000 * 9.8181 = $2,945,430 3. What is tax savings from MACRS depreciation (Use directions on top of page 490) and what is the present value of this tax savings (Use Exhibit 11-7 for the PV factor)? Initial investment * tax rate * PV factor (8%, 10 years) $3.3 million * 40% *.7059 = $931,788 4. Add the two computations together and compare to the initial investment. Is it still profitable on an after tax basis? PV of after tax cash flows vs. initial investment $2,945,430 + $931,788 = $3,877,218 vs. $3,300,000 $3,877,218 - $3,300,000 = $577,218 My recommendation to the managers of Deer Valley is to add the chairlift. The after tax profit will be $577,218 making it a profitable investment. ...read more.


NPV analysis is sensitive to the reliability of future cash inflows that an investment or project will yield. NPV compares the value of a dollar today versus the value of that same dollar in the future, after taking inflation and return into account. Basically, once the calculations are completed and the NPV of a prospective project is positive, then it should be accepted. However, if it is negative, then the project probably should be rejected because cash flows are negative. The minimum desired rate of return can have a large effect on NPV -the higher the minimum desired rate of return, the lower the present value of each future cash inflow and the lower the NPV of the project. Investments that are desirable at one rate of interest may be undesirable at a higher rate of interest. Since we are concerned with cash flows, and not revenues and expenses, depreciation is an expense that does not require a current cash outlay. Depreciation affects capital budgeting decisions by creating a tax savings in the amount of the tax rate multiplied by the depreciation claimed. ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our University Degree Accounting section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related University Degree Accounting essays

  1. Explain the theoretical rationale for the NPV approach to investment appraisal and compare the ...

    The first alternative method I will look at is the 'payback rule'. 'A project's payback period is the length of time before you recover your initial investment' (Brealey et al, p185). When a firm uses the payback rule it must decide on an appropriate cut-off period - if the project

  2. Working Capital Management

    Its marketing offices are spread within and outside the country. The costing department in coordination with production, machine shop, marketing department formalize the price of different products jointly. The price list for each product in their region is circulated to all branch offices.

  1. An Analysis Of harmonization issues of accounting standards

    Positive Group containing 33 sample companies, (2) Negative Group containing 48 sample companies, and at last analysing them as it is shown in the table below: Table 4-7 Statistical Outcome Of Positive and Negative Difference Group Year Negative difference group Positive difference group Average value Z-value P-value Average value Z-value P-value 2002 -9.10 -1.590 0.112 13.04 -2.123


    On January 1, 2005, IAS 22 was superseded by International Financial Reporting Standard 3 (IFRS 3), a new standard to account for business combinations. This was one of the first issues taken on by the IASB to progress its goal of working towards convergence of international standards with US standards.

  1. Interest Rate Parity

    depreciated relative to) the spot rate by x%. If we cover the foreign positions with a forward contract, than it makes no difference whether we invest in dollars or DMs financial markets are very efficient and arbitrage keeps things the same (except for transactions costs).

  2. Investment appraisal methods. Evidence[1] suggests that, NPV (net present value), IRR (internal rate of ...

    However, when we dealing with non-conventional cash flows, i.e. not all future cash flow are positive, we might have more than one IRRs. In this case, we can use modified IRR method to calculate really IRR, but it needs borrowing and investing rate for doing so.

  1. Internal Controls

    11. Do invoice processing procedures provide for: a. Obtaining copies of requisitions, purchase orders and receiving reports as applicable? b. Comparison of invoice quantities, prices, and terms with those indicated on the purchase order? c. Comparison of invoice quantities with those indicated on the receiving reports? d. As appropriate, checking accuracy of calculations?

  2. Capital budgeting: advantages and limitations

    The financial appraisal of the project may predict the expected future cash flows of the project, analyze the risk associated with those cash flows, develop alternative cash flow forecasts, examine the sensitivity of the results to possible changes in the predicted cash flows, subject the cash flows to simulation and

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work