advanced finance case study

Two friends are considering opening a driving range for golfers. Because of the growing popularity of golf, they estimate such a range could generate rentals of 20,000 buckets at $3 a bucket the first year, and that rentals will grow at 750 buckets a year thereafter. The price will remain a $3 per bucket.

Equipment requirements include:

ball dispensing machine $2,000

ball pick-up vehicle $8,000

tractor and accessories $8,000

All the equipment is 5-year ACRS property, and is expected to have a salvage value of 10% of cost after 6 years.

Stocking a small shop selling tees, visors, gloves, towels, sun-block, etc., plus a checking account for the business make net working capital needs $3,000 to start. This amount is expected to grow at 5% per year.

Annual fixed operating costs are expected as follows:

Land lease $12,000

Water 1,500

Electricity 3,000

Labor 30,000

Seed & Fertilizer 2,000

Gasoline 1,500

Equipment maintenance 1,000

Insurance 1,000

Other 1,000

Total $53,000

Expenditures for balls and baskets, initially $3,000, are expected to grow at 5% per year. The relevant tax rate is 15% and the required return is also 15%. The project is to be evaluated over a six year life. Should the friends proceed?