Question

1. 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 7% a year thereafter. The price will remain a $3 per bucket.

            Equipment requirements include:

                        Incorporated fee                        $2,500

                        ball dispensing machine             $2,000

                        ball pick-up vehicle                    $8,000

                        tractor and accessories                $8,000

            All the equipment is 7-year ACRS property and is expected to have a salvage value of 10% of cost after 8 years.

2. 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 $4,000, are expected to grow at 7% per year. The relevant tax rate is 15% and the required return is also 15%. The project is to be evaluated over an 8-year life. Should the friends proceed?

Answer 1

Statement of Net present value
Year	0	1	2	3	4	5	6	7	8
Rental With Growth rate of 7 %		20000	21400	22898	24500.86	26215.92	28051.03	30014.61	32115.63
Revenue		60000	64200	68694	73502.58	78647.76	84153.1	90043.82	96346.89
Annual Fixed Cost		53000	53000	53000	53000	53000	53000	53000	53000
Expenditure on Ball		4000	4280	4579.6	4900.172	5243.184	5610.207	6002.921	6423.126
Interest on Working capital		450	472.5	496.125	520.9313	546.9778	574.3267	603.043	633.1952
Net Inflow		3000	6920	11114.4	15602.41	20404.58	25542.9	31040.9	36923.76
Tax @15%		450	1038	1667.16	2340.361	3060.686	3831.435	4656.135	5538.564
Net Inflow after taxes		2550	5882	9447.24	13262.05	17343.89	21711.46	26384.76	31385.2
Add : Tax shield on Dep		439.2857	439.2857	439.2857	439.2857	439.2857	439.2857	439.2857	0
Expected salvage value after tax @15%									1742.5
Total Net inflow after taxes		2989.286	6321.286	9886.526	13701.33	17783.18	22150.75	26824.05	33127.7
P.V of inflow on ROR @15%		2599.379	4779.8	6500.551	7833.781	8841.381	9576.38	10084.15	10829.5
Sum of PV inflow at initial year	61045
PV of outflow	20500
NPV	40545
Since NPV is positive the the two friend should proceed to work
Assumption
1. Interest on working capital is considered in 15% given rate of return and same is computed after taxes considering it as expenses .
2. For purpose of deprciation for tax purpose salvage value has been considered as nil and expected sales proceed at end of 8 year is considered subjected to capital gain at 15% tax
Working Note on working capital and depreciation
	1	2	3	4	5	6	7	8
Working Capital	3000	3150	3307.5	3472.875	3646.519	3828.845	4020.287	4221.301
Interest on Working capital for opportunity forgone	450	472.5	496.125	520.9313	546.9778	574.3267	603.043	633.1952
Asset Cost	20500.00
Life of equipment	7
Depreciation as per ACRS	2928.571	2928.571	2928.571	2928.571	2928.571	2928.571	2928.571
Tax shield on Dep	439.2857	439.2857	439.2857	439.2857	439.2857	439.2857	439.2857
Expected Salvage value								2050