Task:

Build a 10-year model evaluating the investment. Look at cash flow, NPV, IRR Payback, etc. Is it an attractive investment? Look at some sensitivities and create some scenarios. include an excel valuation model

Key Assumptions and Base Case:

The sale price for the beach shop business is $1.5 million

The purchase price of the investment can be depreciated on straight line 10 year basis

Revenue (and last year annual amounts) comes in four main categories:

Tee shirts and souvenirs ($2.15 million)

Ice cream and snack food services ($2.25 million)

Beach chair rentals ($435,000)

Bar services ($1.75 million)

You believe that with good management you can get the blended cost of service (COS) to 70% of revenue. Assume this COS is the same for all revenue lines.

Selling, General and Administrative (SG&A) is $505,250 per year

The shop needs new coolers and kitchen equipment in year 2 at the cost of $1.32 million that will depreciate on a 7-year straight line basis.

The shop needs to replace its inventory of beach chairs in year 4 at a cost of $350,000. The beach chairs will depreciate on a 5-year straight line basis.

You believe that with good management you can increase revenue for each of the revenue categories at the following rates each year you are in business:

Tee shirts and souvenirs (2.0%)

Ice cream and snack food services (2.25%)

Beach chair rentals (2.0%)

Bar services (3.0%)

You forecast SG&A expenses to increase each year by 3.0%

Total sunk costs of the existing owner of the business is $750,000

The shop was built 35 years ago at an initial cost of $1.1 million

The shop (land, equipment and improvements) has a salvage value of $1.5 million 10 years from now (in the event you wanted to sell it).

The corporate tax rate is 21%

Incremental working capital is a non-issue and can be ignored

You like to evaluate investments using a 6.0% discount rate

The investment will have no corporate debt associated with it