The firm founder purchases a construction crane to rent out. Only equity capital is used, no debt. The terms of the rental are such that the services of a crane operator are included in the lease of the equipment, in a manner similar to the Taxi analysis, wherein the taxi provides the vehicle, and driver.

The firm is contemplating the following:

Crane acquisition cost $ $1,000,000$

Years of useful life $($economic life$)5$

Tax rate $0\%$

Required rate of return on equity $10\%$

Annual revenues $ $2,000,000$

Operating expenses include only: $$Other expenses$$ of $$1,500,000,$ plus depreciation.

Tips:

$1.$Depreciate straight$-$line over the years of useful life down to $$0.$ The Crane will be disposed of at end of the fifth year at no cost$.$

$2.$ The maximum dividend is paid annually.

$3.$ Ignore any working capital effects.

$4.$ Capital charge will be based on the assets at the beginning of each year.

$5.$ If the taxi spreadsheet is used as a starting point to develop a spreadsheet for the analysis, there will still be significant additional work to be done to complete this project.

Please include in the analysis:

$1.$ FINANCIALS: Annual P&Ls

a$.$ Note annual operating margin.

b$.$ What is year $1$: Return on Asset? Return on Equity? EBITDA?

$2.$ CASHFLOW ANALYSIS:

a$.$ OCF analysis

b$.$ Economic Profit analysis

$3.$ PROJECT SELECTION: Does this project deserve consideration?

$4.$ WEALTH CREATION: How much wealth, if any, will the investment in the project create?

$5.$ VALUATION: assume the market is efficient, and the market agrees with your analysis of the project. Immediately after making the investment: what is: the Enterprise Value? Enterprise value as a multiple of EBITDA?

$6.$ MERGER & ACQUISITION: Five minutes after the founder invests in the project the founder receives an offer to purchase the project for $5$X EBITDA. Answer these:

a$.$ All$-$else$-$equal briefly address the merit, if any, of the founder accepting the offer.

b$.$ If the project is acquired, will the Acquirer realize the same$/$higher$/$lower rate of return on their investment that the Seller would have earned on their investment? No need to calculate a rate of return, just answer the question conceptually.