Deer Valley Lodge - Research Paper Example

Deer Valley Lodge Number: Lecturer: Net Present Value Net present value (NPV) tries to compare the present value of cash flows now with the future cash flows. It is used to estimate the potentiality of a profit out of an investment made. It measures the total amount under which an investment is expected to raise based on the present value of its potential cash flows in comparison with the initial cost put into the project. The figures one gets will help inform if one is going to continue with the project or not, this profitability is shown by positive NVP.

Part 1Cost of running the lifts are $500 by 200 days equals to $100,000.The new capacity of the lifts is 300 skiers each day for 40 days and $55 is a ticket price; Therefore, 300 × 40 × 55 earns the lodge $660,000 a year per lift. NPV = R × 1 −( 1 + i )-n − Initial InvestmentiWhere; R is the net cash inflow per year expected in this case $560,000 ($660,000 less $100,000) i is the required rate of return each year; 14% n is the number of years the investment is expected to operate, generating optimum cash flows (20 years).

The initial investment per lift is $3,300,000.NPV = 560,000 × 1 −( 1 + 0.14)-20 − 3,300,0000.14NPV = 560,000 × 1 − (1.14)-20 − 3,300,0000.14NPV = 560,000 × 1 – 0.072762 − 3,300,0000.14NPV = 560,000 × 0.927238 − 3,300,0000.14NPV = 560,000 × 6.623 - 3,300,000NPV = 3,708,880 - 3,300,000NPV = 408,880 per lift From the calculations above, the NPV is a positive figure. In making a decision of an investment, value of NPV is critical in deciding if an investment is good or not.

A positive value means that an investment is good, but a negative value means that the investment is not worth it. In this case, the value is positive; therefore, I would advise the management to go ahead and invest in the project (Megginson et al. 252). Part 2 The net income from the investment annually is $560,000. The tax rate on income is 40% leaving us with 60%. 40% of $560,000 is $224,000, meaning that the after-tax net income is $336,000. The rate of return due to taxation consideration is expected to drop down to 8%, therefore, the MACRS recovery period is 10 years in order to save on tax costs.

The new NPV will mean $336,000 is multiplied by the factor 9.818. This will with NPV of $3,298,848. Here, there is a new twist as the investment is to be depreciated within 10 years. Some money will be saved on taxes by this move. To find the tax savings, the initial investment ($3,300,000) is multiplied by the tax rate to get $1,320,000. The tax savings are then multiplied by the 8% discount rate for ten years resulting in $931,788, tax savings NPV. $931,788 is then added to $3,298,848 to get $4,230,636.

Compared to the $3,300,000, the initial investment we get a resulting figure of $930,636. This is a very big investment as it earns better results than the first scenario with the kind of returns it gives. Part 3 The scenarios painted in the two parts above are just estimates on paper that are hoped will be the case. The figures are assumed that they will remain consistent, but in reality many things could change that might affect the envisioned income streams from the investment. Deer Valley is a resort that depends on the choice of tourists to flock and use the facilities.

Many factors can change the situation including weather conditions like heavy rainfall, delayed snowfall which will come at the supposed peak season or any other natural calamity/disaster that can cause reduced booking of the facility. The weather and natural disaster can result in unforeseen accidents and breakdown of lifts leading to unforeseen costs to repair or pay insurance to the injured. On the other hand, the ticket loss is immense. There are other economic factors that can affect the general economy hence reduce the ability of individuals to afford the luxury offered by the Deer Valley Lodge.

Such things as economic depression as witnessed five years ago, inflation, job loss and redundancy can cause the luxury to be out of reach for some people or the entire population. Therefore, twenty year plans are totally irrelevant when such factors are considered. On the contrary, planning as a management and investment tool must be done while hoping for the best (Warren, 643).Works CitedMegginson, William, Smart, Scott, & Lucey, Brian. Introduction to Corporate Finance. UK. London. South-Western Cengage Learning. 2008. Warren, Carl.

Survey of Accounting. USA. Ohio. South-Western Cengage Learning. 2010.