Question
Golf Inc. (GI) operates a thriving golf cart delivery business, delivering golf carts to golf courses throughout the world on behalf of the cart manufacturers.
Golf Inc. (GI) operates a thriving golf cart delivery business, delivering golf carts to golf courses throughout the world on behalf of the cart manufacturers. With gas prices climbing at an alarming rate, the owner of GI, Forest Podrasky, is contemplating opening up a distribution center in Canada to complement his center in England. GIs revenue comes from the royalties paid by companies, such as Club Cart, whenever GI delivers golf carts to the businesses. Expenses include utilities, salaries to the delivery personnel, and other expenses. Exhibit 1 provides details of the proposed new center in Canada. You are a consultant who specializes in project evaluations and have been hired by GI. Forest would like you to prepare a report to him that analyzes the quantitative information provided in Exhibit 1.
Prepare a quantitative analysis, and discuss any limitations you noted.
EXHIBIT 1
Details for the distribution costs are:
Your consultants fee for providing this analysis is $30,000.
Forest expects that this Canadian venture will end in eight years.
The distribution center will be leased in Canada by GI at a cost of $80,000 per year.
Revenues are expected to be as follows: Years 1 to 5 an increase of $310,000 each year, year 6 $330,000, year 7 $290,000, and year 8 $280,000.
A plane will be purchased just for this distribution center (it will not be purchased if the Canadian venture does not proceed). The cost of the plane is $1.8 million. The salvage value at the end of year 8 is expected to be $120,000.
Increased salaries for the new center are expected to be $60,000 per year for each of the eight years.
Utilities are expected to be 15% of yearly revenues.
GI expects an additional working capital requirement of $250,000 at the beginning. This amount will be recovered at the end of year 8.
The tax rate for GI is 40% and the capital cost allowance rate on the plane is 20%. GIs discount rate is 10%.
The 12 workers who would have to move from England are not happy about the center being in Canada as Canadas football is not the same as theirs. GI has offered to pay them a one-time bonus of $15,000 (shared among all the workers), payable at the end of year 6.
At the end of the contract, GI will receive a completion bonus of $4,000,000.
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