Please help operating and maintaining the lift are estimated to be $1 500 per da
ID: 1172666 • Letter: P
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Please help
operating and maintaining the lift are estimated to be $1 500 per day when operating The US Weather Service estimates at there is a 7 % an average of The owner o a ski resort is considering installing a new ski lift that wil cost $900,000. Expenses estimate that during the bability of 90 days of skiing weather per year, a 25% probability of 100 days per year, and a 5% probability of 120 days per year. The operators o the resort rst 90 days of adequate snow in a season, 450 people will use the lift each day, at a fee of $9 each. If 10 additional days are available, the lift will be used by only 350 people per day during the extra period; and if 20 more days of sking are available, only 250 people per day will use the lift during those days. The owners sh o recover any vested capital within e years and want at least a 20% per year rate o return before taxes. Based on a before a analysis, should the lift be installed? Click the icon to view the interest and annuity table for discrete compounding when the MARR is 20% per year The expected PW of installing a new sk lift is sthousand. (Round to the nearest whole number.)Explanation / Answer
First let’s calculate net operating profit in each situation:
If ski resort operated 90 days (70% probability)
Operating cost = 90 * $1500 = $135,000.00
Revenue = 90 * 450 * $9 = $364,500.00
Net operating profit = Revenue - Operating cost
= $364,500.00 - $135,000.00
=$229,500.00
If ski resort operated 100 days (25% probability)
Operating cost = 100 * $1500 = $150,000.00
Revenue = 90 * 450 * $9 + 10 * 350 * $9 = $396,000.00
Net operating profit = Revenue - Operating cost
= $396,000.00 - $150,000.00
= $246,000.00
If ski resort operated 120 days (5% probability)
Operating cost = 120 * $1500 = $180,000.00
Revenue = 90 * 450 * $9 + 10 * 350 * $9 + 20 * 250 * $9 = $441,000.00
Net operating profit = Revenue - Operating cost
= $441,000.00 - $180,000.00
= $261,000.00
Now expected profit per year for Ski resort from ski lift
= ? probability * operating profit in each situation
= 70* $229,500.00 + 25% * $246,000.00 + 5% * $261,000.00
= $160,650.00 + $61,500.00 + $13,050.00
= $235,200.00
Form given table, we can see that present worth annuity factor at 20% discount rate for 5 years is 2.9906
Therefore Present worth of installing new ski lift = Expected profit per year for Ski resort from ski lift * present worth annuity factor
=$235,200.00 * 2.9906
= $703,389.12 or $703,389 (rounded to nearest whole number)
Ski lift should not be installed as Present worth of installing new ski lift is less than its cost of $900,000.
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