The following information pertains to Fairways Driving Range, Inc.:
The company is considering operating a new driving range facility in Sanford, FL. In order to do so, they will need to purchase a ball dispensing machine, a ball pick-up vehicle and a tractor and accessories for a total cost of $100,000. All of this depreciable equipment will be 7-year MACRS property. The project is expected to operate for 6 years, at the end of which the equipment will be sold for 25% of its original cost. Fairways expects to have $30,000 of fixed costs each year other than depreciation. These fixed costs include the cost of leasing the land for the driving range.
Fairways expects to have sales for the first year of $100,000 based on renting 20,000 buckets of balls @ $5 per bucket. For years 2-6, they expect the number of buckets rented to steadily increase by 1,000 buckets per year, while the price will remain constant @ $5. Expenditures needed for buckets and balls each year are expected to be 20% of the gross revenues for the year.
Fairways will be in the 34% tax bracket for all years in question.
The company has a required capital structure of 40% debt and 60% equity. They can issue new bonds to yield 5%. With respect to equity, the company's beta is 1.60, the expected return on the market is 10% and the risk free rate is 4%. Use this information to compute the company's WACC and then use the WACC as the required return for this project.
Please complete the following tables to determine the NPV for Fairways Driving Range, Inc.'s proposed Sanford venture. PLEASE ROUND ALL FIGURES TO THE NEAREST WHOLE DOLLAR!
For each year of the project, compute the profit margin and EPS (assuming that the firm has 10,000 shares of stock outstanding). Besides the net value of the fixed assets, the company also expects to have $20,000 of other assets. Compute the total assets for each year, use the 40%/60% ratio to determine the total amounts of liability and equity for each year, and use those figures to compute ROA and ROE for each year.
Based on your financial analysis, prepare a paragraph or so of a summary from the stand point of a consultant. In this summary, provide your ideas about this project and what you think would be the best course of action for the company to follow and why. Remember to justify your answers with facts from your calculations as well as provide meaningful insight for the company.
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0*
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1
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2
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3
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4
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5
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6
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Sales
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$100,000
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$105,000
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$110,000
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$115,000
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$120,000
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$125,000
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Variable Costs
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-$20,000
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-$21,000
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-$22,000
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-$23,000
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-$24,000
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-$25,000
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Fixed Costs
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-$30,000
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-$30,000
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-$30,000
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-$30,000
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-$30,000
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-$30,000
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Depreciation
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-$14,290
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-$24,490
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-$17,490
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-$12,490
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-$8,930
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-$8,920
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EBIT
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$55,710
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$50,510
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$62,510
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$72,510
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$81,070
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$97,690
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Taxes
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-$18,941
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-$17,173
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-$21,253
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-$24,653
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-$27,564
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-$33,215
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Net Income
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$36,769
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$33,337
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$41,257
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$47,857
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$53,506
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$64,475
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EBIT
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$55,710
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$50,510
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$62,510
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$72,510
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$81,070
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$97,690
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Depreciation
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$14,290
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$24,490
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$17,490
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$12,490
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$8,930
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$8,920
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Taxes
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OCF
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$51,059
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$57,827
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$58,747
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$60,347
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$62,436
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$61,785
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Net Capital Spending
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-$100,000
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Cash Flow From Assets
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-$100,000
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Present Value
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-$100,000
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NPV (just put overall NPV in Year 0 column)
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Profit Margin
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EPS
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Total Assets
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$120,000
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Total Liabilities
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Total Equity
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ROA
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ROE
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WACC Computation: (.4 X .033) + (.6 X .136) After taxCost of equity
.0132 + .0816 .05 X (1-.34) .04 + 1.6 X (.1-.04)
.0948 = 9.48% .05 X .66 = .033 .04 + 1.6 X .06
.04 + .096
.136
*The only amounts that you will have for year 0 will be Net Capital Spending, Cash Flow from Assets, Present Value and the overall NPV.