Two Friends Are Considering Opening A Golf Driving Range

Two Friends Are Considering Opening a Driving Range For Golfers Becau

Two friends are considering opening a driving range for golfers. They estimate that such a range could generate rental income of 20,000 buckets at $3 per bucket in the first year, with rental volume growing by 750 buckets annually thereafter. The price per bucket remains constant at $3. Equipment costs include a ball dispensing machine ($2,000), a ball pick-up vehicle ($8,000), and a tractor with accessories ($8,000). All equipment is classified as five-year ACRS property and is expected to have a salvage value of 10% of cost after six years. Initial working capital needs are $3,000, expected to grow at 5% annually, which covers the stocking of a small shop selling golf accessories and other operational expenses. Annual fixed operating costs total $53,000, including land lease, water, electricity, labor, seed and fertilizer, gasoline, equipment maintenance, insurance, and miscellaneous expenses. Expenditures for golf balls and baskets are initially $3,000 and are projected to increase at 5% per year. The project faces a 15% tax rate, and the required return is also 15%. The analysis period is six years, and the goal is to evaluate whether the friends should proceed with the investment.

Paper For Above instruction

The decision to invest in a new business venture such as opening a driving range necessitates a comprehensive financial analysis. This encompasses estimating future cash flows, understanding capital costs, and evaluating profitability within the context of market growth and operational costs. The evaluation over a six-year horizon involves forecasting revenues, constructing detailed expense schedules, calculating depreciation, and considering tax implications to arrive at net cash flows. This paper examines these components thoroughly, providing a systematic evaluation based on the assumptions given, and ultimately determining whether the project offers a financially viable opportunity.

Forecasting Revenue and Operating Income

The initial rental volume of 20,000 buckets at $3 per bucket generates $60,000 in yearly revenue for year one. As rental demand is projected to grow by 750 buckets annually, the revenue escalation can be represented as a sequence: Year 2, 20,750 buckets; Year 3, 21,500 buckets; Year 4, 22,250 buckets; Year 5, 23,000 buckets; Year 6, 23,750 buckets. The revenue each year is obtained by multiplying the number of buckets by the fixed price, yielding a steady increase in gross income.

Capital Expenditures and Equipment Depreciation

Initial equipment costs total $18,000, allocated among the ball dispensing machine ($2,000), pick-up vehicle ($8,000), and tractor ($8,000). Using ACRS (Accelerated Cost Recovery System) over five years, these assets will depreciate, with salvage value estimated at 10% after six years, implying an estimated residual value of $1,800. Depreciation expenses are calculated according to IRS guidelines for five-year property, affecting taxable income and cash flow.

Working Capital and Operating Expenses

Starting working capital costs are $3,000, increasing at 5% annually, reflecting the need for inventory replenishment, shop supplies, and cash reserves. Fixed operating costs amount to $53,000 annually, covering land lease, utilities, wages, seed, fertilizer, gasoline, maintenance, insurance, and miscellaneous costs. The expenditure for golf balls and baskets starts at $3,000 and escalates at the same 5% rate, affecting the cash flow and profit margin. This comprehensive expense estimate ensures accurate calculation of operational cash flows throughout the project’s life.

Taxation and Cash Flow Analysis

Tax implications are incorporated by applying a 15% tax rate to taxable income, which is calculated by deducting depreciation and other expenses from rental revenues. Cash flows are adjusted for non-cash depreciation benefits and capital expenditures, including initial investment costs and salvage value. Operating cash flows are used to assess the project’s viability, with discounted cash flows (DCF) computed at the 15% required return to determine the net present value (NPV).

Investment Decision and Conclusion

By summing discounted cash flows over the six-year horizon, the project’s NPV provides a clear signal: a positive NPV indicates a worthwhile investment, whereas a negative NPV suggests otherwise. Sensitivity analyses further assess the impact of changes in key assumptions, such as rental growth rate, equipment salvage value, and operational costs. If the calculated NPV is positive, and the rate of return exceeds the required 15%, the friends should proceed with the venture. Conversely, if NPV is negative or marginal, reconsideration or strategic modifications may be warranted.

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