Chickadee Ski Club (CSC) is located in southern Ontario near large urban centres but not far enough north to guarantee a full winter of snow on the ground. The club's revenue and profit jump in years when the weather is cold and snowy but fall when the winters are mild. When the club was founded 30 years ago, winters in southern Ontario were consistently cold and there was snow on the ground from mid-November until early spring, approximately four months of business for a ski hill. Now, winters are much more unpre- dictable and CSC is considering ways it can adapt to the changing climate to remain profitable and offer skiers a fantastic ski experience.

CSC purchased its current snow-making equipment eight years ago. While the equipment still works, it has to be moved around the ski hill manually using sleds and the snow it produces is low quality.

CSC's operations manager, Louise Crépeau, is considering purchasing 40 new high-pressure snow guns. The new snow guns are permanently attached to poles in various places on the ski hills, eliminating the need to move the equipment around the ski hill. The snow guns produce higher-quality snow and, most impor- tantly, they can be used at a warmer temperature than the old snow-making equipment. Louise estimates the high-pressure snow guns will extend CSC's season approximately two weeks since it can make snow when the weather is warmer.

The following information relates to the purchase of the new snow guns:

» CSC wants to buy 40 high-pressure snow guns at $5,000 each. The new snow guns are expected to last five years and have an estimated salvage value of $250 each.

» CSC can sell its current snow-making equipment for $4,000 today.

» If Louise buys the new snow guns, she will no longer need an employee to move the old snow- making equipment around the ski hill. Assume this person works for 3 months of the year, 10 days per month, and 6 hours per day. The labour rate for this type of worker is $15 per hour.

» The new snow guns also use less electricity. Louise estimates they will save $100 per month during the three months of the year they are open for business.

» Since the new snow guns can make snow when the weather is warmer, Louise believes this will extend their ski season by at least two weeks (most likely one week earlier at the beginning of the season and one week later at the end of the season). The price of a lift ticket is $50, approximately 300 skiers use the hill on a typical day, and CSC's contribution margin percentage is 20%.

Chickadee Ski Club has a required rate of return of 10% for all capital investments.

Required

You have been hired as an outside consultant to write a report for CSC recommending whether it should buy the snow guns. Your report should analyze the relevant quantitative and qualitative aspects of the decision and also consider any issues that will impact the decision.

Answer rating: 100% (QA)

Solution 1 An initial investment of 196000 is required 2 Annual cash flow amount 4500... View the full answer