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Assume that the after-tax required rate of return for Deer Valley is 8%, the income tax rate is 40%, and the MACRS recovery period is 10 years. Compute the after-tax NPV of the new lift and advise the managers of Deer Valley about whether adding the lift will be a profitable investment. Show calculations to support your answer.
The depreciation basis is 3,300,000. The MACRS-10 calculation of depreciation and then after-tax OCF are shown in the Excel table below (click and open to see the formulas).
Again, the NPV is positive. So it is profitable.
3. What subjective factors would affect the investment decision?
Since the demand of ticket sales of 300 a day during the 40 days is just a projected figure the management would never know what the actual number would be in advance...
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