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Deer Valley Lodge Investment Decision - Essay Example

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The company’s management should accept the project as a profitable project since it has a high positive NPV. There are certain investment decisions which the company’s management has to consider before accepting the project. …
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Deer Valley Lodge Investment Decision
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Deer Valley Lodge Investment Decision al Affiliation) a) Before tax NPV: The lift cost: 5 * $2M = $10 million The installing cost: 5 * $1.3M = $6.5 million
The total initial cost: $10M + $6.5M = $16.5 million
Revenue: 300 * 40 * $55* 5 = $3.3 million
Running costs: 200 * 5 * $500 = $500000
Project life = 20 years
Before tax discount rate is 14%
Annuity = (1- 1 / (1 + r) ^n) / r
= (1- 1 / (1 + 0.14) ^20) / 0.14
= 6.623
The before tax NPV will be $2.0444 million. The management should accept this project since it has a positive net present value (Brigham and Houston, 2004).
b) After tax NPV:
After tax discount rate is 8%
Project life is 10 years
Annuity = (1- 1 / (1 + 0.08) ^10) / 0.08
= 6.71
Depreciation = $10M / 10 = $1M
Income tax saved on depreciation= 40% * $1M =$ 0.4M
The after tax NPV is $4.972M. The company’s management should accept the project as a profitable project since it has a high positive NPV. There are certain investment decisions which the company’s management has to consider before accepting the project. The management should compare the projects net present value and those of other projects since capital is always a limited resource in companies. The payback period of the project should also be determined before accepting the project so that the management may know the duration it will take before the project can repay the capital used (Paramasivan and Subramanian, 2009).
References
Brigham, E., & Houston, J. (2004). Fundamentals of financial management. Mason, Ohio: Thomson/South-Western.
Paramasivan, C., & Subramanian, T. (2009). Financial management. New Delhi: New Age International (P) Ltd., Publishers. Read More
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