Unit 5 IP

Unit 5 IP: Deer Valley Case

Question 1

The total investment in the project is $ 3300000 ($2000000 + $1300000) while the annual cash inflow comes out to be $660000 while the annual cash outflow would be $100000. The present value cash flows at a rate of 14 percent comes out to be $3708953. Thus, the net present value comes out to be $408,953. For detailed computations, refer to the excel sheet attached.

From the computations, we can derive that the new lift will be able to create a total value of USD $408,953 and thus, the project should be taken since it would lead to profitability (Gazely, 2006).

Question 2

NPV is a business management code of the dynamic investment calculation (Eun, 2007). It is a method by which the present value of a series of expected cash flows is computed not only by summing accounting but updating them on the basis of the rate of return (the opportunity cost of equity) (Abrams, 2005).

From the given case, the after tax value of cash flows derived is $336000 while the present value of the cash flow after tax at a rate of 8 percent comes out to be $3298897. The present value of the tax saving is computed as $936540. In this regards, it is the Present Value Factor for a period of 10 yrs and depreciation value is 0.7059 (with reference to exhibit 11-7 of the book). The net present value after tax is $935438 which reveals that the investment will lead to profitable returns relative to the pretax NPV (Horngren, 2003).

Question 3

There are other several subjective factors that also have considerable influence on the profitability of the investment (Morgan, 2010). These include

Profitability of the sales of food, expense on the equipment rentals, and purchase of items by additional skiers.

The project ...