The owner of a ski resort is considering installing a new ski lift that will cos
ID: 2741916 • Letter: T
Question
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?
Explanation / Answer
Average no. of days skiing = 90
Assuming three different situation for decision making-
In all situation whether skiing used for 80 days or 100 days or 120 days there is sufficient surplus availabe to cover minimum required return @15% and also payback period is below 5 year as required by investor. Hence Lift should be instaled.
Probability No. of days Prob.*Days 0.60 80 48 0.30 100 30 0.10 120 12 Total 90 daysRelated Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.