The owner of a ski resort is considering installing a new ski lift that will cos

Question

The owner of a ski resort is considering installing a new ski lift that will cost S900,000. Expenses for operating and maintaining the lift are estimated to be S1,000 per day when operating. The U S Weather Service estimates that there is a 55% probability of 80 days of ski ng weather per year, a 30% probability of 90 days per year and a 15% 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 450 people will use the lift each day, at a fee of $8 each. If 10 additional days are available, the lift will be used by only 400 people per day during the extra period; and if 30 more days of skiing are available, only 250 people per day will use the lift during those days. The owners wish to recover any invested capital within four 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? Click the icon to view the interest and annuity table for discrete compounding when the ARR is 25% per year. The expected PW of installing a new ski lift is thousand Round to the nearest whole number

Explanation / Answer

0.55(8*450)+0.3(8*400)+0.15*(8*250)=1980+960+300=3240 per day

3240*365=$1182600

PW of Annual Expected Revenue=1182600/1.25+1182600/1.25^2+1182600/1.25^3+1182600/1.25^4=$2.792,828

Annual Cost=$1000*365=$365000

PW of Annual Cost=365000/1.25+365000/1.25^2+365000/1.25^3+365000/1.25^4=$861984

Initial Cost=$900000

PW=2792828-900000-861984=$1030844 Is our answer

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