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Should the state install the turbine

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Problem 1: The state uses an 8 percent cost of capital for its ski areas. Based on purely financial analysis, should the state install the turbine?

  • In addition, the snowmaking equipment in the Bear Mountain section of Glory Mountain has been in service for nearly 15 years and has reached the end of its useful life. It will have to be replaced before the next ski season. Management has narrowed its decision down to two options: Big Mouth Snow Guns with a useful life of 15 years and the Whisper Quiet Snowmaking System with a useful life of 10 years. The Big Mouth system will cost Glory $850,000 to acquire and $35,000 per year to operate, while the Whisper Quiet system would only cost $600,000 and $50,000 per year to operate.
  • If the Big Mouth equipment is chosen, there will be no change in Glory's other operating costs. If the Whisper Quiet system is purchased, Glory's annual fuel and equipment costs will increase by $15,000.
  • Regardless of the option Glory chooses, the snowmaking system chosen will be depreciated over ten years with an assumed 5 percent residual value. Glory uses straight-line depreciation.

Reference no: EM132935582

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