Reference no: EM131507196

Question: Refer to Problem. Assume the following changes: the study period is eight years; the ski lift will be depreciated by using the MACRS Alternative Depreciation System (ADS); the ADS recovery period is seven years; MARR = 15% per year (after-tax); and the effective income tax rate (t) is 40%. Based on this information, what is the E(PW) and SD(PW) of the ATCF? Interpret the analysis results and make a recommendation on installing the ski lift.

Problem: The owner of a ski resort is considering installing a new ski lift that will cost $900,000. Expenses for operating and maintaining the lift are estimated to be $1,500 per day when operating. The U.S. Weather Service estimates that there is a 60% probability of 80 days of skiing weather per year, a 30% probability of 100 days per year, and a 10% probability of 120 days per year. The operators of the resort estimate that during the first 80 days of adequate snow in a season, an average of 500 people will use the lift each day, at a fee of $10 each. If 20 additional days are available, the lift will be used by only 400 people per day during the extra period; and if 20 more days of skiing are available, only 300 people per day will use the lift during those days. The owners wish to recover any invested capital within five years and want at least a 25% per year rate of return before taxes. Based on a before-tax analysis, should the lift be installed?