5 Responsibility Centers and Financial Control

Deer Valley Lodge, a ski resort in the Wasatch Mountains of Utah, has plans to add five new chairlifts, eventually. Each company has a certain amount of money to spend on large projects. In this case, for this company, it is for 5 ski lifts. We will analyze the cost benefits or losses of adding one lift. To decide what to do we will use the NPV that tell us the present value of all cash inflows and cash outflows. If the net NPV is positive we accept the project, if it is negative, we reject it.

Facts: Cost of one lift $2 million

Prep & install $1.3 million

Running the new lift $500 a day for 200 days

Cash expenses per skier $5

Lift tickets $55 a day

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.

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%. 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 to support your answer.

PV Cash inflows:

300 tickets * 40 days * $55 each = $660k

PV factor from table 2 = 6.6231

Present Value = $660k * 6.6231 = $4,371,246

One time cost out

Price per lift -$2.0M

Prep & Install -$1.3M

Total one time outflow -$3.3M

PV Cash Out flow

Cost of running lift $500 * 200 days = -$100k

300 tickets * 40 days * $5 per rider = -$60k

PV factor same as above 6.6231

Present Value = -$160k * 6.6231 = -$1,059,696

NET PRESENT VALUE

$4,371,246 -$3.3M -$1,059,696 = $11,550

Net