Boyne Mountain Resort is a small ski resort located just outside Boyne Falls, Michigan; approximately 250...

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Boyne Mountain Resort is a small ski resort located just outside Boyne Falls, Michigan; approximately 250 miles from both Chicago and Detroit. The resort consists of slopes that appeal to skiers of several different skill levels, though none of the slopes are difficult enough to appeal to the most highly skilled skiers. For a modest $25 lift fee, resort guests are allowed unlimited access to any of the resort's slopes for the day. In recent years, other regional ski slopes in northern Michigan and in Wisconsin have steadily eroded attendance at Boyne Mountain. Resort attendance has dropped from 250,000 in 2004 to 190,000 for the recently completed 2010 season. Current projections are that the trend will continue, dropping attendance to 180,000 in 2011, and 175,000 in 2012, before leveling off at 170,000 for 2013 and beyond. Lift ticket prices are expected to increase at the rate of inflation, 5%. Following completion of the 2010 season, Boyne Mountain hired a market research company to conduct a survey aimed at uncovering the primary reasons for the decline in resort attendance. The survey revealed that many teens preferred other resorts because of new modern chair lifts that had been added to each resort. The market research firm strongly urged Boyne Mountain to consider purchasing a new set of state-of-the-art chair lifts of its own. In addition to the $20,000 Boyne Mountain has spent on the survey, a new set of chair lifts would initially cost the resort $1,500,000. The new lifts would be ready for the opening of the 2011 season. The resort's current lifts were purchased at the end of the 2006 season for $400,000. They are being depreciated on a straight-line basis over an 8-year life. However, Boyne Mountain anticipates that their useful life could be stretched to 10 years (if not replaced) at which time they could be sold for $50,000. Each year the resort spends $20,000 on maintenance of the old chair lifts. If the new lifts are purchased, Boyne Mountain would sell its current lifts immediately. However, the expected sales price would still be just $50,000. If purchased, the new lifts are expected to be depreciated on a straight-line basis over a six-year useful life. Boyne Mountain believes that the new lifts could be sold for $100,000 at the end of their 6-year useful life. Annual maintenance expenses are expected to be $15,000. Boyne Mountain believes that if the new lifts are purchased, resort attendance will remain constant at 2010 levels for the foreseeable future. In addition, they believe that the new lifts will allow them to increase the resort's lift ticket price to $30 for the 2011 season. After 2011, they anticipate increasing ticket prices at the expected rate of inflation, 5%. Boyne Mountain maintains a minimum cash balance of $25,000. Due to the nature of the business, other working capital accounts (e.g., inventory, accounts receivable and accounts payable) are negligible. Regardless of resort attendance, the resort maintains a staff of 150 employees at an average cost of $10,000 per employee per season. The nominal after-tax discount rate on the project is 12% and the resort's marginal tax rate is 34%. Conduct an analysis to assist Boyne Mountain in deciding whether to purchase the new lifts. Assume that all cash flows are at year-end. That is, if Boyne Mountain purchases the new lifts, the purchase will take place at the end of 2010. Boyne Mountain Resort is a small ski resort located just outside Boyne Falls, Michigan; approximately 250 miles from both Chicago and Detroit. The resort consists of slopes that appeal to skiers of several different skill levels, though none of the slopes are difficult enough to appeal to the most highly skilled skiers. For a modest $25 lift fee, resort guests are allowed unlimited access to any of the resort's slopes for the day. In recent years, other regional ski slopes in northern Michigan and in Wisconsin have steadily eroded attendance at Boyne Mountain. Resort attendance has dropped from 250,000 in 2004 to 190,000 for the recently completed 2010 season. Current projections are that the trend will continue, dropping attendance to 180,000 in 2011, and 175,000 in 2012, before leveling off at 170,000 for 2013 and beyond. Lift ticket prices are expected to increase at the rate of inflation, 5%. Following completion of the 2010 season, Boyne Mountain hired a market research company to conduct a survey aimed at uncovering the primary reasons for the decline in resort attendance. The survey revealed that many teens preferred other resorts because of new modern chair lifts that had been added to each resort. The market research firm strongly urged Boyne Mountain to consider purchasing a new set of state-of-the-art chair lifts of its own. In addition to the $20,000 Boyne Mountain has spent on the survey, a new set of chair lifts would initially cost the resort $1,500,000. The new lifts would be ready for the opening of the 2011 season. The resort's current lifts were purchased at the end of the 2006 season for $400,000. They are being depreciated on a straight-line basis over an 8-year life. However, Boyne Mountain anticipates that their useful life could be stretched to 10 years (if not replaced) at which time they could be sold for $50,000. Each year the resort spends $20,000 on maintenance of the old chair lifts. If the new lifts are purchased, Boyne Mountain would sell its current lifts immediately. However, the expected sales price would still be just $50,000. If purchased, the new lifts are expected to be depreciated on a straight-line basis over a six-year useful life. Boyne Mountain believes that the new lifts could be sold for $100,000 at the end of their 6-year useful life. Annual maintenance expenses are expected to be $15,000. Boyne Mountain believes that if the new lifts are purchased, resort attendance will remain constant at 2010 levels for the foreseeable future. In addition, they believe that the new lifts will allow them to increase the resort's lift ticket price to $30 for the 2011 season. After 2011, they anticipate increasing ticket prices at the expected rate of inflation, 5%. Boyne Mountain maintains a minimum cash balance of $25,000. Due to the nature of the business, other working capital accounts (e.g., inventory, accounts receivable and accounts payable) are negligible. Regardless of resort attendance, the resort maintains a staff of 150 employees at an average cost of $10,000 per employee per season. The nominal after-tax discount rate on the project is 12% and the resort's marginal tax rate is 34%. Conduct an analysis to assist Boyne Mountain in deciding whether to purchase the new lifts. Assume that all cash flows are at year-end. That is, if Boyne Mountain purchases the new lifts, the purchase will take place at the end of 2010.