1.

Investment = $2,000,000 + $1,300,000 = $3,300,000

Annual cash inflow = 300 skiers x 40 days x $55/skier-day = $660,000
Annual cash outflow = (200 days x $500/day) = $100,000
Net Cash flows = 660,000-100,000 = $560,000.
PV of cash flows @ 14% = $560,000 x 6.6231= $3,708,953
NPV = $3,708,953 - $3,300,000 = $408,953
The new lift will create value of $408,953, so it is a profitable
investment.

2. After-tax cash flows = $560,000 x (1-0.4)= 560,000 x 0.6 =

$336,000
PV of after-tax cash flows @ 8% = $336,000 x 9.8181 (from table) =
$3,298,897
PV of tax savings = $3,300,000 x .4 x .7059 (from table) = $936,540
NPV after-tax = $3,298,897 + $936,540 - $3,300,000 = $935,438
The investment in the lift is more profitable on an after-tax basis than
on a pretax basis.

3. Subjective factors that might affect this decision include:

Profits on sales of food, rental of equipment, and other items
purchased by the additional skiers.
More satisfied customers because of less crowding on the days
that the additional lift does not result in additional skiers being
attracted to Deer Valley.
If the weather is bad, additional skiers may be less than
estimated.