Capital budgeting and sensitivity analysis Magic Mountain Enterprises runs a ski center. Its 14 downhill runs vary in difficulty from beginner to expert. To at¬ tract more customers, Maria Jasper, the owner/manager, is considering develop¬ ing cross-country ski trails. The cross-country ski trails would take two years to build and would cost $1,000,000 per year to build. The trails would open for business in year 3 and would generate $500,000 per year in net cash flows. Maria has a required return of 12% on all investments.

The land on which the trails would be built is leased. The lease costs are in¬ cluded in the $500,000 annual net cash flow calculation. The lease will expire nine years from now, that is, after the trails have been operated for seven years. There will be no opportunity to renew the lease, and Maria will not be compen¬ sated for any of the work done building the ski trails.

(a) Compute the net present value of the decision to enter the cross-country ski business. Should the investment be made? (Ignore taxes in your analysis.)

(b) What is the minimum annual net cash flow from the cross-country ski business during the seven years of operations that would make this invest¬ ment desirable?

(c)What other factors would you consider in making the decision?

(LO 1)