Situation:

It is January 1, 2017. The hotel chain Qubec star.inc has been trying for several years to make profitable its resort located in northern British Columbia in the middle of the Canadian rockies. The resort is in fact composed of a luxury hotel, a 36-hole golf course and a lake allowing the presence of nautical activities. The center is located at the foot of a 15,000 foot high mountain which is also owned by the company. The mountain was acquired exactly 10 years ago at a cost of $ 3 million. The company has just been offered by a private developer a sum of $ 4 million for the acquisition of the mountain.

The company is considering exploiting the mountain. To help it in its decision, the company called on the firm "Fairenousconfiance inc. ", A renowned consulting firm in the field of project evaluation. After cashing a check for $ 30,000 in fees, the latter proposed an investment project to operate a ski resort on the mountain.

Here is the project:

The company plans to keep the resort and the mountain for another 20 years and leave the area thereafter. She therefore asked the consulting firm to make income and expense projections for the next 20 years.

The project requires an investment of 1 million in equipment. Added to this is the acquisition of 4 snow groomers to manufacture and maintain the slopes. It is possible to purchase 2 of the 4 second hand snow groomers for $ 10,000 each. The other 2 will have to be purchased new for $ 50,000 each. To complete the project, the company will also have to construct a building at the foot of the slopes at a cost of $ 800,000. Note that all these investments are necessary at the start of the project if we want the site to be operational from January 1, 2018 (i.e. in exactly 1 year). The company will also have to invest in exactly 1 year, $ 200,000 recoverable at 90% at the end of the project.

During 2017 there will be no exploitation since it is necessary to proceed with the development of the land. The consulting firm anticipates that the project should generate income of $ 1 million for the first year of operation (i.e. 2018). This amount should grow by 10% per year for the next 5 years and remain stable thereafter. Expenses for the first year of operation are estimated at $ 700,000 and are expected to grow 2% per year thereafter. Note that operating income and expenses are assumed to be received at year end.

To finance part of the project, the company plans to take out a loan in which interest will be paid annually in the amount of $ 20,000 (end of period from 2017). All goods are sold after 19 full years of operation (so at the start of the 21st year from today). The building at the foot of the mountain will be worth $ 900,000. The snow groomers can be resold for an amount equal to their unamortized balance (UCC). The equipment will have lost 30% of their price paid and the value of the land (i.e. the mountain) is expected to have increased at the rate of inflation which we assume stable at 2% per year.

The company's accountant confirms that the tax depreciation rate for buildings is 4%, that for equipment is 20% and that for snow groomers is 30%. The marginal corporate tax rate is 28% and the required return for a project with this level of risk is 22%. Fiscally, the project is considered independent from the company, at the end of the project, there is therefore a closure of all fiscal categories relating to the project.

To help the company in its decision, you are asked to calculate the NPV associated with the ski resort project. Use the 8-step NPV approach to calculate each of the components of NPV.