EDs BOWLING ALLEY

Choice 1: In 2013 Ed intends to invest $1,500,000 in a bowling alley. After two years of operation, he plans to invest an extra $450,000 in the business ( 2015) by opening a restaurant. In 10 years Ed anticipates selling the business for $3 million.

Ed expects the Revenues to start in 2013 at $300,000. They will remain unchanged until 2016 when overall Revenues will grow to $500,000 per annum. His cash variable operating expenses are expected to be $100,000 (each year 2013 2015) and then $200,000 for 2016 2023.

Eds cost of capital will be 8%. Ed would like to earn at least a 20% internal rate of return.

Choice 2: Ed can also lease, in 2013, a bowling alley that is located in a different city. The front end lease payment is $250,000 in 2013 and then the annual lease cost is $30,000 from 2014-2023. The yearly operating cash revenue from operations is estimated at $50,000 in 2013 and $230,000 for the next 10 years. Ed would also like to make a 20% return on this investment. Cost of capital 8%.

Your Homework:

1) Prepare a time line and complete the NPV, IRR and Payback calculations related to these two opportunities. 2) Which opportunity is the better choice for Ed? Why?