A net present value analysis requires Vail Resorts, Inc. (MTN) to estimate the initial investment, the years of expected useful life, the expected additional investment, the yearly returns from additional investments (differential revenues minus differential costs), and the overall desired rate of return.
Significant uncertainty relates to the preceding estimates. For example, weather significantly influences ski revenues (shorter winters mean fewer skiers) as well as the costs for running the resort (low snowfall means more costs incurred using snow machines to provide snow). In addition, the demand for skiing is driven in part by the U.S. and worldwide economy. In hard economic times, fewer people can afford ski vacations.
Vail’s financial statements can provide external stakeholders information for assessing the quality of Vail’s capital budgeting decisions. For example, Vail reported increasing revenues and profits for each of the three years following its purchase of Park City Mountain Resort. External stakeholders’ assessment of Vail’s capital budgeting decision was reflected in its stock price, which almost tripled in the three years following Vail’s purchase of Park City Mountain Resort.