The following information pertains to Fairways Driving Range, Inc.:The company is considering operating a new driving range facility in Sanford, FL. In order to do so, they will need to purchase a ball dispensing machine, a ball pick-up vehicle and a tractor and accessories for a total cost of $70,000. All of this depreciable equipment will be 7-year MACRS property. The project is expected to operate for 6 years, at the end of which the equipment will be sold for 40% of its original cost. Fairways expects to have $40,000 of fixed costs each year other than depreciation. These fixed costs include the cost of leasing the land for the driving range.Fairways expects to have sales for the first year of $80,000 based on renting 20,000 buckets of balls @ $4 per bucket. For years 2-6, they expect the number of buckets rented to steadily increase by 750 buckets per year, while the price will remain constant @ $4. Expenditures needed for buckets and balls each year are expected to be 15% of the gross revenues for the year.The project would have an initial working capital requirement of $5,000 and this requirement will be 10% of all revenues after that. Fairways will be in the 15% tax bracket for all years in question. The company’s required rate of return for this project is 20%.Please complete the following tables to determine the NPV for Fairways Driving Range, Inc.’s proposed Sanford venture. PLEASE ROUND ALL FIGURES TO THE NEAREST WHOLE DOLLAR!

Expert Answers

| Certified Educator

See
This Answer Now

Start your 48-hour free trial to unlock this answer and thousands more. Enjoy eNotes ad-free and cancel anytime.

Already a member? Log in here.

From the information provided, Fairways has a plan to operate a driving range facility for 6 years. The initial investment is machinery worth $70000. The depreciation of the machinery is tax deductible and the final value is 40% of the original value or $28000. The sales are estimated to be 20000 buckets of balls which at $4 per bucket is $80000 for the first year; the sales increase by 750 buckets every year for years 2 - 6. The price is constant at $4.

In year 1, the sales are $80000. The expenditure is 0.15*80000 + 5000 + 40000= 57000. The gross income is 23000. The tax-deductible depreciation is 7000. The gross income is 16000. With a rate of taxation of 15%, the net income is 13600

In year 2, sales are $83000. The expenditure is 83000*(0.15+0.1) + 40000 = 60750. The gross income is 22250. The taxes are applicable to 15250. The net income is 12962.5

In year 3, sales are 86000. The expenditure is 86000*(0.15+0.1) + 40000 = 61500. The gross income is 24500. The taxes are applicable to 17500. The net income is 14875

In year 4, sales are 89000. The expenditure is 89000*(0.15+0.1) + 40000 = 62250. The gross income is 26750. The taxes are applicable to 19750. The net income is 16787.5

In year 5, sales are 92000. The expenditure is 92000*(0.15+0.1) + 40000 = 63000. The gross income is 29000. The taxes are applicable to 22000. The net income is 18700

In year 6, sales are 95000. In addition the initial investment's resale value is $28000. The expenditure is 95000*(0.15+0.1) + 40000 = 63750. The gross income is 59250. The net income is 50362.5

As the required rate of return is 20%, the NPV of the project is 13600/1.2 + 12962.5/1.2^2 + 14875/1.2^3 + 16787.5/1.2^4 + 50362.5/1.2^5 - 70000 = 57278.66 - 70000 = -12721

The NPV of the project is a negative value of -$12721.

Approved by eNotes Editorial Team