Question

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 $104,000. All of this depreciable equipment will be 5-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 $38,000 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 $104.000 based on renting 20,800 buckets of balls $5 per bucket For years 2-6, they expect the umber of buckets rented to steadily JOGE by 1,300 buckets per year, while the price will remain constant @ 34.50. Expenditures needed for buckets and balls each year are expected to be 23% of the gross revenues for the year Fairways will be in the 30% tax bracket for all years in question The company has a required capital structure of 30% debt and 70% equity. They can issue new bonds to yield 4.5% With respect to equity, the company's beta is 1.55 the expected retum on the market is 14% and the risk-free rate is 5% Use this information to compute the company's WAOC and then we 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 16,000 shares of stock outstanding). Besides the net value of the fived assets, the company also expects to have $20,000 of other assets. Compute the total 25gets for each year, use the 30% 70% 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 parcareph or 50 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 dry. Remember to justify your anemers with facts from your calculations as well as provide meaningful insight for the company. Sales Variable Costa Fixed Costs Depreciation EBIT Taxes Net Income | EBIT Depreciation Taxes OCFT Net Capital Spending Cash Flow From Assets Present Value NPV (just put overall NPV in Year 0 column) Profit Margin EPSI Total Assets Total Liabilities Total Equity ROE WACC Computation: The only mounts that you will have for year O will be Net Capital Spending, Cash Flow from Assets, Present Value and the overall NPV.

Answer 1

Units		20800	22100	23400	24700	26000	27300
Year	0	1	2	3	4	5	6
Sales	-	1,04,000	99,450	1,05,300	1,11,150	1,17,000	1,22,850
Variable Cost	-	23,920	22,874	24,219	25,565	26,910	28,256
Fixed Cost	-	38,000	38,000	38,000	38,000	38,000	38,000
Depreciation	-	20,800	33,280	19,968	11,981	11,981	5,990
EBIT	-	21,280	5,297	23,113	35,605	40,109	50,604
Taxes	-	6,384	1,589	6,934	10,681	12,033	15,181
Net Income	-	14,896	3,708	16,179	24,923	28,076	35,423
EBIT	-	21,280	5,297	23,113	35,605	40,109	50,604
Depreciation	-	20,800	33,280	19,968	11,981	11,981	5,990
Taxes	-	6,384	1,589	6,934	10,681	12,033	15,181
OCF	-	42,080	38,577	43,081	47,586	52,090	56,595
Net Capital Spending	-1,04,000						26,000
Cash Flow From Assets	-1,04,000	42,080	38,577	43,081	47,586	52,090	82,595
Present Value	-1,04,000	36,714	29,366	28,613	27,575	26,336	36,434
NPV(Just put overall NPV in year 0 column)	81,037
Profit Margin (70% of net income for equity)	-	10,427.20	2,595.29	11,325.37	17,446.30	19,653.51	24,796.01
EPS (Earning/number of shares)	-	0.65	0.16	0.71	1.09	1.23	1.55
Total Assets		2,16,891.47	69,005.44	2,33,851.15	3,49,429.59	3,91,107.11	4,88,210.32
Total Liabilities [EBIT X (30/100)] / 0.045		1,41,866.67	35,310.00	1,54,086.67	2,37,364.67	2,67,394.67	3,37,360.67
Total Equity (profit margin/return om equity)		55,024.80	13,695.44	59,764.49	92,064.92	1,03,712.44	1,30,849.65
ROA (Net Income/Total Assets)		0.07	0.05	0.07	0.07	0.07	0.07
ROE (Profit Margin/Total Euity)		0.19	0.19	0.19	0.19	0.19	0.19
CALCULATION
	Sales	=No. of units Sales x sales price per unit
	Variable Cost	= 23% OF SALES
	Depreciation Rate
	Year	Rate
	1	20.00%
	2	32.00%
	3	19.20%
	4	11.52%
	5	11.52%
	6	5.76%
Calculation of Return on Euity	= Risk Free rate + Beta (Market Rate - Risk Free Rate)
	= 5+ 1.55(14-5)
=	18.95
Calculation of WACC	= Return on Equity x Weight of equity + Return on Bonds x Weight of bonds)
	=18.95 x 0.70 + 4.5 x 0.30
=	14.615
Calculation of Present Value of Cash Inflow
Year	PVF
1	0.872486149
2	0.761232081
3	0.664164447
4	0.579474281
5	0.505583284
6	0.441114412