Cash Flow Project---Colorado Ski Resort

Please solve the following question and fill in the table given.

Im thinking of building a full-service ski resort that would cater to lousy skiers. Your job is to help me determine whether this would be a worthwhile investment. To date, Ive already spent $15 Million dollars in research and development costs. In addition, Ive spent $4 Million in test marketing that suggests there is huge demand for a beginners-only ski resort. Since I dont plan on cooperating with the U.S. Forest Service, I expect the resort to be shut down after four years of operation (i.e., there are no CFs in year 5).

Except for the initial investment, which will occur immediately, assume all cash flows will occur at year-end. Up-front cash flows will be recognized immediately, and the first annual cash will be recognized 12 months from today.

In order to build a first class resort, I will need to invest $100 Million in buildings and equipment now. The fixed assets are expected to have only an eight-year life, at which time they will be worthless. However, I can sell the building and equipment in Year 4 for $30 Million after the project is ended. I plan on marketing to two distinct customer markets:

1. Season Passes The Season Pass market will be comprised of locals who want to enjoy a leisurely day of skiing without having to worry about dodging people all day. I expect to sell my Season Passes at an average of $730 per pass in the first year. Research indicates that my incremental variable costs will be $600 per pass in the first year.
2. Daily Tickets This market will be comprised of seasonal visitors. This market allows higher margins because the users arent as price sensitive. The average lift ticket will cost $60 in the first year, while the variable costs are estimated to be $27 per visitor in the first year.

The above prices for the Season Pass and Daily Lift Ticket assume an allowance for other costs, such as parking, food, and other concessions. I plan on raising my prices each year at 1.00% above the inflation rate, which is forecasted to be 2.00% per year. Variable costs will also increase at 1.00% above the inflation rate. In addition, the Resort will incur $15 Million in marketing and administrative costs in the first year; this number will increase at the inflation rate in all subsequent years. The Resort will be incorporated, so assume the corporate tax rate will be 35%. The discount rate is 12% per year.

Expert industry analysts expect 60,000 season passes to be purchased first year at the industry level; this will grow at an estimated 7.50% per year thereafter. I expect to capture about 8.00% of this market each year. The same analysts expect 12 million daily lift tickets to be sold in the first year, which should increase by 12.00% per year. I should be able to capture 10.00% of this market.

I will depreciate the buildings and equipment using the IRS MACRS schedule for seven-year property. The fixed assets will depreciate 14.29% in Year 1, 24.49% in Year 2, 17.49% in Year 3, 12.49% in Year 4, 8.93% in Years 5-7, and the remaining balance in Year 8. I will also need to consider net working capital requirements in this scenario. The immediate initial working capital requirement is $15 million (at the beginning of the project) to pay for inventory (t-shirts and hamburger meat). Thereafter, the annual requirements will be 15% of Sales (becoming $0 at the end of the final year of the project). Should I undertake this project??

	YEAR	0	1	2	3	4
SALES REVENUE:
	Season Pass Market
	# of Passes
	Price per Pass
	SEASON PASS SALES REVENUE
	Daily Lift Tickets
	# of Tickets Sold
	Price per Ticket
	DAILY LIFT TICKET SALES REVENUE
	TOTAL SALES REVENUE
VARIABLE COSTS:
	Season Pass Market
	# of Passes
	cost per Pass
	Season Pass Costs
	Daily Lift Tickets
	# of Tickets Sold
	Price per Ticket
	Lift Ticket Costs
	TOTAL VARIABLE COSTS
FIXED COSTS:
	Marketing & Administrative
	Depreciation
	TOTAL FIXED COSTS
EARNINGS BEFORE INTEREST And TAXES (EBIT)
Corporate Tax Expense
After-tax Earnings (EBIT(1-t))
Add:	Depreciation
	Operating cash flows
OTHER ITEMS (for calculation purpose)
Level of Working Capital
Change in Working Capital
Less:	Change in WC
Less:	Capital Expenditure
Add:	Asset sales proceeds
Add:	Tax savings from capital losses
NET CASH FLOW FROM ASSETS

(Please provide a simple explanatory page below)