The firm founder purchases a construction crane to rent out.  Only equity capital is used, no debt.  The terms of the rental are such that the services of a crane operator are included in the lease of the equipment, in a manner similar to the Taxi analysis, wherein the taxi provides the vehicle, and driver.

The firm is contemplating the following:

Crane acquisition cost                                  $ 1,000,000

Years of useful life (economic life)                 5

Tax rate                                                           0%

Required rate of return on equity                  10%

Annual revenues                                 $ 2,000,000

Operating expenses include only: "Other expenses" of $1,500,000, plus depreciation.

Tips:

1.Depreciate straight-line over the years of useful life down to $0.  The Crane will be disposed of at end of the fifth year at no cost.

2. The maximum dividend is paid annually.

3. Ignore any working capital effects.

4. Capital charge will be based on the assets at the beginning of each year.

5. If the taxi spreadsheet is used as a starting point to develop a spreadsheet for the analysis, there will still be significant additional work to be done to complete this project.

 

Please  include in the analysis:

1. FINANCIALS: Annual P&Ls
   1. Note annual operating margin.
   2. What is year 1: Return on Asset? Return on Equity? EBITDA?
2. CASHFLOW ANALYSIS: 
   1. OCF analysis
   2. Economic Profit analysis
3. PROJECT SELECTION: Does this project deserve consideration?
4. WEALTH CREATION: How much wealth, if any, will the investment in the project create?
5. VALUATION: assume the market is efficient, and the market agrees with your analysis of the project.  Immediately after making the investment: what is: the Enterprise Value? Enterprise value as a multiple of EBITDA?
6. MERGER & ACQUISITION: Five minutes after the founder invests in the project the founder receives an offer to purchase the project for 5X EBITDA. Answer these:
   1. All-else-equal briefly address the merit, if any, of the founder accepting the offer.
   2. If the project is acquired, will the Acquirer realize the same/higher/lower rate of return on their investment that the Seller would have earned on their investment?  No need to calculate a rate of return, just answer the question conceptually.

Answer rating: 100% (QA)

Answer To analyze the project of purchasing and renting out a construction crane well go through the requested steps 1 Financials Annual PLs Well calculate the annual operating margin which is the ope... View the full answer