• 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...

Introduction

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.

Middle

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.

Conclusion

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. Working Capital Management

    favor of suppliers and undertakes the responsibility of payment obligation of its client. b) Bank guarantee: bank guarantee is like issuance letter of credit where by the customers bank gives the guarantee to VEL to undertake responsibility of payment obligation of its credit.

  2. Management Accounting. A number of factors will influence the outcome of an investment appraisal ...

    Cost accounting can clearly show the company about what is the expenditure during the processes and where was it used. However, the disadvantage of the cost accounting system is it does not tell who spent the money. It is failed to fix individual responsibility for money spent.

  1. Drakensberg Limited Case Report. The main problems are whether to launch a new product ...

    In this case, the optimal output (i.e. to maximize the total contribution) before production of Dankieisis first analyzed. Considering the maximum available amount of raw materials, skilled labor and machine hours, the utilization rate is calculated if all the demand is satisfied.

  2. Discuss and critically evaluate the role of management accountants in providing relevant information to ...

    By doing so, managers prevent mislead of product pricing while evaluating mix product decisions and approach a better pricing decisions. ACTIVITY-BASE COSTING BACKGROUND AND DEVELOPMENT ABC method is a refined cost system by identifying individual activities as the fundamental cost objects such as allocation cost using smaller cost pools known as activities.

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

    Steps: 1. Calculate the NPV of all cash outflows using the borrowing rate. 2. Calculate the NFV of all cash inflows using the investing rate. 3. Calculate r by the equation: Payback Period Payback period method is the only method, in this essay's discussion, which not based on discount cash flow.

  2. UK BUSINESS Tax

    Ireland, in recent years has obtained significant growth rates in comparison to the UK. This is due to its low tax levels, beneficial legal and regulation regimes and the approach from their government and Tax authorities. Many jobs which could have been obtained in the England are now in Ireland because of their Tax regime.

  1. Value Chains Versus Supply Chains

    Dit beleidsprogramma is op 28 mei 2003 door de Gemeenteraad vastgesteld. Het einde van deze bestuursperiode nadert en met het oog op de nieuwe gemeenteraadsverkiezingen, begin volgende jaar, heeft de Raad gevraagd om een evaluatie van Hermez. Als uitvoerder van Hermez heeft Economische Zaken van de gemeente Amsterdam aan dit verzoek gehoor gegeven.

  2. Capital budgeting: advantages and limitations

    Capital budgeting is a type of quantitative analysis done by business managers to provide support for their making of investment decisions. If done correctly, capital budgeting can analyze the benefits, risks and cost of the investment over time. One major difference between capital expenditure and capital budgeting is that

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