Question: you work for a venture capitalist and have been asked...
You work for a venture capitalist and have been asked to analyse a proposal from a group of investors interested in building a new ski area in New Zealand, the Mount Ruapehu Ski Resort. The demand for skiing is growing. Existing ski resorts have raised prices and reported record profits for the last two seasons. Mount Ruapehu’s business strategy is to offer the ultimate ski experienceshort lift lines, uncongested ski slopes, and spectacular scenery. With a 2,500-foot vertical drop, 10 trails, and a single triple (three-person) ski lift, it can provide a very uncongested ski resort.
The planned triple-person ski lift delivers a chair every 20 seconds, 180 chairs per hour (3 chairs per minute × 60 minutes per hour), or 540 skiers per hour (180 chairs per hour × 3 skiers per chair). This puts an average of only 54 skiers per hour on each of the 10 trails. Some trails will be more popular than others, but this average number of skiers per trail per hour is still below industry average.
The cost to build the ski runs, parking lots, and buildings and to erect the chair lift is $52 million. To raise this amount of capital requires an annual financing cost (debt service and dividends) of $8.3 million. The annual fixed operating cost (land lease, utilities, labour, taxes, insurance) of the ski resort is projected to be $4.1 million. For each 100 skiers per day, additional employees must be hired to staff the ticket office, ski patrol, parking lots, and so forth. The daily cost of the additional labour is $200 per 100 skiers per day.
The typical skier makes two ski runs per day (uses the lift twice). Ski resorts operate their lifts 8 hours per day, 120 days per year. Mount Ruapehu plans to sell one-day lift tickets for $60 per skier per day; no season passes will be offered.
Required 1. Write a memo to the venture capital partner in charge of this account recommending one of three actions: aggressively pursue this investment, gather more information, or reject immediately. Justify your recommendation with a concise, well-reasoned, fact-based analysis.
2. After completing your analysis in (1), but before you submit it to your boss informs you that it is changing the triple-person chair lift to a four-person chair lift. This new chair will add an additional $75,000 per year to the annual financing cost, bringing the annual financing cost to $8.375 million. But instead of being able to lift 540 skiers per hour, the new chair can lift 720 skiers per hour. How do these new facts alter your conclusion in (1)?