Question

Please answer question 3! This question had been asked before but unfortunately all of the answers were to question 1, not Question 3. I have deleted question 1 from the information so that Question 3 is more available for viewing.

The Glory Mountain State Ski Area – owned and managed by a state public authority - expects to attract 292,500 skier days during the coming ski season. A skier day represents one skier at the mountain for one day. In addition to a $2,000,000 per year subsidy provided by the state, Glory currently earns its revenue from three sources: lift ticket sales, ski lessons, and food sales in the mountain’s lodges. Forty-five percent of the customers come to the mountain on weekends and pay an average of $60 per day to ski. The remaining 55 percent of the skiers come during the week and pay an average of $45 per day for a lift ticket. On average, 10 percent of the people who visit Glory take ski lessons. An average person taking lessons pays $80 for each lesson. Management also estimates that each skier spends an average of $4 per day on food. Food costs average 40 percent of total food revenue.

Glory’s central management staff is paid $1,800,000 per year. The remainder of Glory’s staff is seasonal and is paid on an hourly basis. The table below shows the number of employees by job title, the number of days they work on average, their hourly wages, and the number of hours they work each day. Only ski instructors and patrol costs vary with skier days. Benefits add 30 percent to direct salary costs for all workers including management.

Equipment costs and usage are also shown in the table below. For equipment, number refers to the number of pieces of equipment. Equipment costs depend on the number of days the area is open during the season. The hourly fuel cost represents the cost of fuel to operate the equipment for each hour they are open.

Insurance costs are $15,000 per day for each of the 130 days the area expects to be open. Energy costs are $2,240,000 per year and are based on the number of days the area is open. Neither energy nor insurance costs vary based on skier days.

QUESTION 3:

In addition, the snowmaking equipment in the Bear Mountain section of Glory Mountain has been in service for nearly 15 years and has reached the end of its useful life. It will have to be replaced before the next ski season. Management has narrowed its decision down to two options: Big Mouth Snow Guns with a useful life of 15 years and the Whisper Quiet Snowmaking System with a useful life of 10 years. The Big Mouth system will cost Glory $850,000 to acquire and $35,000 per year to operate, while the Whisper Quiet system would only cost $600,000 and $50,000 per year to operate.

If the Big Mouth equipment is chosen, there will be no change in Glory’s other operating costs. If the Whisper Quiet system is purchased, Glory’s annual fuel and equipment costs will increase by $15,000.

Regardless of the option Glory chooses, the snowmaking system chosen will be depreciated over ten years with an assumed 5 percent residual value. Glory uses straight-line depreciation.

Question 3: Based on Glory’s 8 percent cost of capital, which system should management choose?

	Number	Days Worked	Hours Worked	Hourly Wage
Instructors & Ski Patrol	275	100	7	$20.00
Lift Attendants, Maintenance & Grooming	140	130	10	$18.00
Kitchen Staff	50	130	8	$12.00
Equipment & Fuel Costs	60	130	6	$65.00

Answer 1

Q3. The management should choose whisper quiet snowmaking system as the cost incurred will save the ski $265,801.26.

Attributes	Big Mouth Guns	Whisper system
	(in $)	(in $)
Initial Acquisition Cost	850,000.00	600,000.00
Increase in cost	-	100,651.22
Depriciation	485,037.13	382,474.64
Salavge value		-13,890.00
Total cost	1,335,037.13	1,069,235.86

Net savings

265,801.26

Working for Present value
	Big Mouth Guns		Whisper system
Depriciation SLM (per annum)	56666.66667	Depriciation SLM (per annum)	57000
(Acquisition cost-Savage value/Useful life)	850000-0/15 years	(Acquisition cost-Savage value/Useful life)	600000-30000/10 years
PVAF(8%,15 years)	8.559479	PVAF (8%,10)	6.710081398
Present value for 15 years of Depriciation	485037.1433	Present value for 10 years of Depriciation	382474.6397
(Depriciation * PVAF(8%,15yrs)	(56,666.6667*8.559479)	(Depriciation * PVAF(8%,10yrs)	(57,000*6.710081)
		Salvage value (5% of acquisition cost)	30,000.00
		PVF(8%,10th year)	0.463
		Present value of salvage value	13890
Additional Cost per annum	NIL	Additional Cost per annum	15,000
		PVAF (8%,10)	6.710081398
		Present value of additional cost	100,651.22