You are an investment analyst for a small Dallas based investment company. The deal team has identified
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Question:
You are an investment analyst for a small Dallas based investment company. The deal team has identified an interesting investment opportunity for your firm to purchase a golf course. You need to evaluate the opportunity and make a recommendation to management on whether to move forward in acquiring the golf course.
Key Assumptions and Base Case:
- The sale price for the golf course is $3.5 million
- The purchase price of the investment can be depreciated on straight line 25 year basis
- Revenue (and last year annual amounts) comes in three main categories:
- Golf playing fees and memberships ($1.85 million)
- Food and beverage services ($775,000)
- Pro shop and apparel($435,000)
- Hosted events ($3.15 million)
- You believe that with good management you can decrease the cost of service (COS) to 70% of revenue
- Selling, General and Administrative (SG&A) is $1.55 million per year
- The course needs new maintenance equipment in year 5 at the cost of $1.32 million. The maintenance equipment will depreciate on a 10 year straight line basis.
- The course needs a new sprinkler system in year 10 at the cost of $1.45 million. The sprinkler system will depreciate on a 10 year straight line basis.
- You believe that with good management you can increase revenue for each of the revenue categories at the following rates:
- Golf playing fees and memberships (3% growth)
- Food and beverage services (2.75% growth)
- Pro shop and apparel(2.5% growth)
- Hosted events (2.5% growth)
- You forecast SG&A expenses to increase each year by 3.5%
- Total sunk costs on the golf course project is $2,750,000
- The course was built 35 years ago at an initial cost of $2.1 million
- The golf course (land, equipment and improvements) has a salvage value of $1.5 million 25 years from now (in the event your company wanted to sell it).
- The corporate tax rate is 21%
- Incremental working capital is a non-issue and can be ignored
- The company evaluates projects using a 12.0% discount rate
- The project will have no corporate debt associated with it
Related Book For
Financial Statement Analysis
ISBN: 978-0078110962
11th edition
Authors: K. R. Subramanyam, John Wild
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