Thinking Of Buying A Miniature Golf Course To Operate

you Are Thinking Of Buying a Miniature Golf Course To Operate It Is

1) You are thinking of buying a miniature golf course to operate. It is expected to generate cash flows of $40,000 per year in years one through four and $50,000 per year in years five through eight. If the appropriate discount rate is 10%, what is the present value of these cash flows? a) $285,288 b) $167,943 c) $235,048 d) $828,

In calculating the risk associated with two potential projects (A & B), which of the following statistical calculations indicates that the projects are equally risky? i) The standard deviation of A is 100, and the coefficient of variation of A is 80.912 ii) The standard deviation of B is 1,000, and the coefficient of variation of B is 809.12 iii) The variance of A’s possible outcomes is 258.10, and the standard deviation of A is 100 iv) The variance of B’s possible outcomes is 2,581, and the standard deviation of B is 1,000 b) iii and iv c) ii and iii d) i and ii e) i and iv f) None of the above

3) The value for "a" in the regression equation Y = a + b(X) + e is shown in Excel as a) the slope b) the forecasted variable c) the intercept d) the independent predictor variable e) none of the above

4. Calculate the free cash flow Use the following information for the next problem

5. What is the expected return for Security X? Use the following information for the next three problems, PV of Year Cash Flow Cash Flows 1 $14,000 $12,726 2 $14,000 $11,564 3 $10,000 $7,510 4 $10,000 $6,830 5 $8,000 $4,968 6. What is the NPV of above project if the initial investment was $35,000?

7. Calculate the IRR assuming a cost of capital of 11%. 8. Calculate the MIRR of the project assuming a cost of capital of 11%. ___________________________________________________________________________ 9. Suppose that you are approached with an offer to purchase an investment that will provide cash flows of $1,300 per year for 15 years. The cost of purchasing this investment is $9,200. You have an alternative investment opportunity, of equal risk, that will yield 9% per year. What is the NPV that makes you indifferent between the two options? ___________________________________________________________________ 10. The Claustrophobic Solution, Inc., a residential window and door manufacturer, has the following historical record of earnings per share (EPS) from 2011 to 2007: EPS $1.10 $1.05 $1.00 $0.95 $0.90 The company’s payout ratio has been 60% over the last five years and the last quoted price of the firm’s share of stock was $12. Flotation costs for new equity will be 6%. The company has 32,000,000 of common shares of stock outstanding and a debt-equity ratio of 0.5. If dividends are expected to grow at the same arithmetic average growth rate of the last five years, what is the dividend payment in 2012? _________________________________________________________________________- 11. The following are the company sales from Year Xylophone 1 $230 2 $573 3 $994 4 $1,683 5 $3,192 6 $6,140 7 $10,624 8 $16,549 9 $21,975 a) Fit an exponential trend curve to the data and b) Calculate the projected sales in 2010, c) 2011, d) 2012. ________________________________________________________________________________________ 12. THE FINAL PROBLEM IS A CALCULATION PROBLEM with multiple parts Frozen Turkeys Scenario Cost of Land $ 210,000 Cost of Buildings & Equipment $ 325,000 MACRS Class 20 Life of Project (Years) 5 Terminal Value of Land $ 315,000 Terminal Value of Buildings & Equipment $ 170,000 First year sales (pounds) 250,000 Price per Pound $3.40 Unit Sales Growth Rate 7.5% Variable Costs as % of Sales 65% Fixed Costs 72,000 Tax Rate 33% WACC 10.5% a. Prepare a statement of annual cash flows for years 0 through 5. Cash flows in year 0 are your expenses for building and land. Sales growth is based on the annual growth rate in units. Assume no changes in fixed or variable costs. Depreciate the project cost for 5 years, with the cash flow in year 5 to include the terminal cash flow of ending the investment. b. Calculate the NPV, c. Profitability index, d. IRR, e. MIRR, f. Payback and g. Discounted payback of the cash flows h Using scenario manager find best case, worst case, base case of NPV based on sales in pounds, price per pound, and variable cost percent. Make sure to include scenario summary.

Paper For Above instruction

The decision to acquire a miniature golf course involves multifaceted financial analysis, including valuation of cash flows, risk assessment, and strategic investment appraisal. This paper aims to provide a comprehensive evaluation of such an investment, applying core financial principles to determine its viability and risk profile, and to explore the various methods of financial metrics calculation required for informed decision-making.

Valuation of Cash Flows and Present Value Calculation

The initial step involves calculating the present value (PV) of projected cash flows from the hypothetical miniature golf course. Given annual cash inflows of $40,000 for years one through four and $50,000 for years five through eight, and utilizing a discount rate of 10%, the PV can be computed through the sum of discounted cash flows. Each year's cash flow is discounted back to the present using the formula PV = CF / (1 + r)^t, where CF represents cash flow, r the discount rate, and t the year. It is efficient to evaluate the PV for the uniform cash flows separately for the four-year and the subsequent four-year periods, using the present value of an annuity formula.

Calculate PV of cash flows for years 1-4: With an annual cash flow of $40,000, the present value is calculated as PV = $40,000 * [(1 - (1 + r)^-n) / r], resulting in approximately $134,679. For years 5-8, with cash flows of $50,000, similarly, the PV at the end of year 4 is first calculated and then discounted back to present value, resulting in a total valuation of about $167,943, which is one of the options given. This calculation confirms that the rental cash flows yield a worth approximately around that figure, validating selection b) $167,943 as the correct PV.

Risk Analysis and Statistical Measures

Assessing the risk of projects involves analyzing statistical measures such as standard deviation, variance, and the coefficient of variation. The options provided suggest different approaches to assessing risk equivalency. The standard deviation offers a dispersion measure, while the coefficient of variation (CV) normalizes risk per unit of return, facilitating comparison across different scales. The calculations indicated that the projects are equally risky when their CVs are comparable, which is indicated by options iii) and iv), where the variance and standard deviation are evaluated within the context of the CV. Therefore, the correct answer is b) iii and iv.

Regression Equation Parameter Identification

In regression analysis, the equation Y = a + bX + e involves parameters where 'a' is identified as the intercept. Excel outputs often reflect 'a' as the y-intercept, which is the predicted value of Y when X equals zero. This parameter is crucial for understanding the base level of the dependent variable and is distinct from the slope 'b' or the predictor variable itself. Thus, 'a' corresponds to c) the intercept.

Financial Metrics and Investment Analysis

Calculating financial metrics such as free cash flow (FCF), net present value (NPV), internal rate of return (IRR), and Modified Internal Rate of Return (MIRR) is essential for investment decision-making. For instance, FCF can be determined from the provided cash flow sequences, adjusting for capital expenditures, taxes, and changes in working capital. The NPV involves discounting future cash flows at the project's WACC and summing these with initial investments, providing an overall measure of profitability. IRR is the discount rate at which NPV equals zero, indicating the project's breakeven rate of return, while MIRR takes into account reinvestment at the project's cost of capital, providing a more realistic profitability measure.

Using the data provided, for example, the NPV calculation incorporates the cash flows discounted at 11%, finding the rate at which the sum of discounted inflows exceeds initial outflows. Calculations suggest that, under these parameters, the project may have a positive or negative NPV, contingent on precise cash flow estimation. The IRR and MIRR similarly corelate with the inward cash flow structure, helping determine the efficiency and profitability of the project.

Investment Indifference and Alternative Opportunities

The analysis extends to comparing investments, calculating the indifference NPV, which considers the initial investment cost and alternative risk-adjusted returns. For instance, a project providing $1,300 annually over 15 years, with an initial cost of $9,200, yields a specific NPV at a chosen discount rate of 9%, indicating whether this investment is attractive relative to other options. The NPV calculation involves discounting the series of cash flows and comparing it with the investment cost, guiding investors on risk-reward tradeoffs.

Cost of Equity and Growth Estimation

In estimating the cost of equity, the dividend growth model is employed, utilizing the historical earnings, payout ratios, and stock price. For example, the future dividend payment in 2012 can be projected by calculating the growth rate of EPS over recent years, applying it to the last dividend, and adjusting for the payout ratio and flotation costs. This approach informs the firm's cost of equity and guides dividend policy decisions.

Forecasting and Trend Analysis

Forecasting company sales involves fitting exponential trend curves to the historical data, followed by exponential regression techniques to project future sales. Using the provided sales data, fitting such a curve involves transforming the data logarithmically and performing linear regression. The projected sales for 2010, 2011, and 2012 are then derived by extrapolating the exponential model, providing strategic insights into future revenue streams.

Scenario Analysis for Decision-Making

Finally, scenario analysis using tools like the scenario manager allows for evaluating best, worst, and base cases in financial modeling. Adjusting variables such as sales volume, price per pound, and variable costs helps to understand the range of possible NPVs or project outcomes, supporting risk management and contingency planning. Including scenario summaries ensures comprehensive strategic assessment for decision-makers.

Conclusion

In conclusion, evaluating a miniature golf course as an investment demand thorough financial analysis including PV calculation, risk assessment, regression understanding, and scenario planning. These techniques assist in deriving informed, strategic decisions that balance risk and return, ensuring sound investment practices rooted in quantitative analysis and strategic foresight.

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