Deer Valley Lodge

With 300 skiers for forty days per year, an additional 12,000 lift tickets will be sold at $55 per, totaling incremental revenue of $660,000 per year. The added variable cost of running this lift is $100,000 per season. Using these figures at a 14% discount rate, the net present value (NPV) of this project is $408.95. Under the assumption that all projects with a positive NPV should be undertaken, this project should also be undertaken. The problem with this recommendation is that the breakeven point is fourteen years away, which is a long time for some of the assumptions underlying this calculation to change.

The depreciation expense on the lift provides a significant after-tax benefit. The depreciation expense is used to reduce the net income for tax purposes. In the case of Deer Valley, the depreciation expense for the first ten years under the 10-year MACRS schedule creates a tax benefit greater than the variable costs of operating the lift. Offsetting the variable costs for the first ten years of the project is significant -- the project effectively pays for itself once depreciation is taken into consideration. The NPV using the after-tax hurdle rate of 8% is $3.595 million. It is recommended that Deer Valley undertake this project.

3. There are a number of subjective factors that can affect an investment decision. The project needs to fit with the overall strategy of the organization -- in this case it probably does. The organization needs to have access to financing, which can be difficult in some circumstances no matter what the NPV might be. Additionally, the organization needs to have the resources to execute the project. For a ski hill, their might be concerns with environmental surveys or use of American Indian land or National Park land, for example. Market demand is another key subjective factor -- this demand at present is merely theoretical, and the assumption used the highest level of projected demand in the revenue calculation. If all of the subjective factors line up, and the NPV is comfortably above zero, then the project should be undertaken.