I$$m 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, I$$ve already spent $$15$ Million dollars in research and development costs. In addition, I$$ve spent $$4$

Million in test marketing that suggests there is huge demand for a beginners$-$only ski resort. Since I don$$t 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

aren$$t as price sensitive$.$ The average lift ticket will cost $$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 $1\mathrm{.}00\%$ above the inflation rate, which is forecasted to be $2\mathrm{.}00\%$ per year. Variable

costs will also increase at $1\mathrm{.}00\%$ 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 $7\mathrm{.}50\%$

per year thereafter. I expect to capture about $8\mathrm{.}00\%$ 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 $12\mathrm{.}00\%$ per year. I should be able to capture $10\mathrm{.}00\%$ of this market.

I will depreciate the buildings and equipment using the IRS MACRS schedule for seven$-$year property. The fixed assets will depreciate

$14\mathrm{.}29\%$ in Year $1,24\mathrm{.}49\%$ in Year $2,17\mathrm{.}49\%$ in Year $3,12\mathrm{.}49\%$ in Year $4,8\mathrm{.}93\%$ 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??

$3$

YEAR $01234$

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

$4$

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$)$