Deer Valley Lodge With 300 Skiers for Essay

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Deer Valley Lodge

With 300 skiers for forty days per year, an additional 12,000 lift tickets will be sold at $55 per, totaling incremental revenue of $660,000 per year. The added variable cost of running this lift is $100,000 per season. Using these figures at a 14% discount rate, the net present value (NPV) of this project is $408.95. Under the assumption that all projects with a positive NPV should be undertaken, this project should also be undertaken. The problem with this recommendation is that the breakeven point is fourteen years away, which is a long time for some of the assumptions underlying this calculation to change.

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The depreciation expense on the lift provides a significant after-tax benefit. The depreciation expense is used to reduce the net income for tax purposes. In the case of Deer Valley, the depreciation expense for the first ten years under the 10-year MACRS schedule creates a tax benefit greater than the variable costs of operating the lift. Offsetting the variable costs for the first….....

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