1. I am asked to compute the before-tax Net Present Value or NPV of a new ski lift for Deer Valley Lodge and advise the management there of the profitability. Before I am able to make this calculation there are a few calculations that I will need to make first. First the total amount of the investment, this will be the cost of a lift itself $2 million plus the cost of preparing the slope and installing the lift $1.3 million. Thus the investment amount for one lift is $3.3 million.
Next I will need to find out the yearly net income from the investment. This will be gross ticket sales minus the total expenses. Deer Valley expects 300 skiers per day for 40 days at $55.00 per ticket, giving us $660,000 in ticket sales. In order to figure the total expenses I need to separate the fixed and variable expenses. Fixed expenses are those that will be there everyday the lodge is open regardless of the number of skiers. The Lodge is open 200 days per year and the cost of running the new lift is $500 per day for the entire 200 days giving us $100,000 in fixed costs. Variable costs are the expenses based on the number of customers. There is an additional $5 expense per skier per day associated with the new lift. If there are 300 skiers multiplied by $5 each multiplied by the 40 days that they are expected to be on the lift, we will have $60,000 in variable expenses. Fixed costs of $100,000 plus the variable costs of $60,000 will give us $160,000 in total expenses. The gross ticket sales of $660,000 minus the total expenses of $160,000 give us a yearly net income of $500,000.
The new lift has an economic life of 20 years and we would like to make 14% on our investment. The NPV factor of 14% at 20 years is 6.6231. By multiplying our net yearly income or our annuity of $500,000 times the NPV factor of 6.6231 we will have a NPV of $3,311,550.
When comparing the NPV to the amount of the investment I find that there will be a before tax profit of $11,550, meaning that this could be a good investment.
2. I am now asked to compute the after-tax NPV of a new lift and again advise the management of the profitability.
After calculating WACC my second analysis would be of the packaging machine investment. I will use incremental analysis and calculate NPV of the incremental cash flows of both strategies (to wait or to invest now). After calculating NPV’s of both scenarios I will calculate the difference between the two.
Star Appliance is looking to expand their product line and is considering three different projects: dishwashers, garbage disposals, and trash compactors. We want to determine which project would be worth doing by determining if they will add value to Star. Thus, the project(s) that will add the most value to Star Appliance will be worth pursuing. The current hurdle rate of 10% should be re-evaluated by finding the weighted average cost of capital (WACC). Then by forecasting the cash flows of each project and discounting them by the WACC to find the net present value, or by solving for the internal rate of return, we should be able to see which projects Star should undertake.
The following table demonstrates the PV of costs, the PV of benefits and the NPV respectively, over 5-year period for the investment:
If Tottenham Hotspur follows the second alternative, the NPV is estimated to be £27.51M, while using the third alternative results in a more favorable value of £82.32M. So the option of stadium and player will increase substantially from 2010 onward, only if the growing rates apply.
1) Total Variable Costs are 60% of Total Costs; While the other 40% are from fixed costs.
This analysis shows that the projects NPV as 13.37 million dollar. Our result is slightly different than the presenting team because of rounding. But both of our teams had positive NPV which suggest that the project should be accepted.
Discounted Cash Flow Method takes the forecast free cash flows during forecasted horizon. Then we estimate the cost of capital (weighted average cost of capital) and estimate continuing value (value after forecast horizon). The future value is discounted to the present value. We than add back cash ($13 Million) and non-current assets and deduct total debt. With the information provided several assumptions had to be made to obtain reasonable values (life period of 30-years, Capital expenditures not to exceed $1 million dollars, depreciation to stay constant at $1.15 Million and a discounted rate of 10%). Based on our analysis, the company has a stand-alone value of $51 Million at the end of fiscal year end 1990 with a net present value of cash flows of $33 million that does not include the cash and non-current assets a cash of and non-current assets.
This project belongs in the engineering-efficiency category; therefore, it has to fit at least 3 of 4 performance hurdles, which are 1. Impact on EPS; 2.Payback; 3.Discounted cash flow and 4. Internal rate of return.
I would not sell it but invest in the business. The consultants have the detailed data. As you can see from my chart year 1 PV cash flow would be negative 238, then year 2 PV cash flow would be negative 227, and year 3 PV cash flow would be negative 43, and year 4 the cash flow would be negative 41 and year 5 we hit a positive 157 and years going forward we see positive growth. The project pays for itself by year 9 or year 10 when you look at the cumulative PV.
Variable costs: “Variable costs are costs that vary with the volume of activity”2 and they are: direct labor, Materials, Material spoilage & direct department expenses.
The estimated free cash flows for the two strategies are $391 million for the growth strategy and $365 million for the maintain strategy. (Please refer to the excel sheet for breakdown of calculation).
612,000/85,000,000= .0072% (~3/4 of 1% of revenues in 1-200hp market { what % is 5-10hp sales?})
Lululemon’s has to produce and sell 150,000 jackets in order to cover their total expenses, fixed and variable. At this level of sales, Lululemon’s will breakeven (profit = loss).
For the first year, planting expenses of Luxi was 632RMB/mu while Donji was 255 RMB/mu. The variable cost of Luxi project was 367+110=477 RMB/mu/year, while Dongji project cost 87+45=132 RMB/mu/year. Consequently, including first year expenditure, Luxi totally costs 3,971 RMB/mu for 7 years, whereas Dongji costs 1,575 RMB/mu for 10 years. To calculate revenue, Luxi could earn 12.6×559=7,043.4 RMB/mu, whilst Dongji could get 8.0×445=3,560 RMB/mu. Then, profit per year equals (Reve...
The Net Present Value (NPV) is a Discounted Cash Flow (DCF) technique that relies on the concept of opportunity cost to place a value on cash inflows arising from capital investment, where opportunity cost is the "calculation of what is sacrificed or foregone as a result of a particular decision".