Two friends are considering opening a driving range for golfers Because of the growing popularity of golf, they estimate such a range could generate rentals of 20,000 buckets at $3 a bucket the first year, and that rentals will grow at 7 a year thereafter The price will remain a $3 per bucket Equipment requirements include Incorporated fee $2,500 ball dispensing machine $2,000 ball pick up vehicle $8,000 tractor and accessories $8,000 All the equipment is 7 year ACRS property and is expected to have a salvage value of 10 of cost after 8 years Stocking a small shop selling tees, visors, gloves, towels, sun block, etc , plus a checking account for the business make net working capital needs $3,000 to start This amount is expected to grow at 5 per year Annual fixed operating costs are expected as follows Land lease $12,000 Water 1,500 Electricity 3,000 Labor 30,000 Seed Fertilizer 2,000 Gasoline 1,500 Equipment maintenance 1,000 Insurance 1,000 Other 1,000 Total $53,000 Expenditures for balls and baskets, initially $4,000, are expected to grow at 7 per year The relevant tax rate is 15 and the required return is also 15 The project is to be evaluated over an 8 year life Should the friends proceed

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Posted on Aug 27, 2024

Two friends are considering opening a driving range for golfers. Because of the growing popularity of golf, they estimate such a range could generate rentals

Two friends are considering opening a driving range for golfers. Because of the growing popularity of golf, they estimate such a range could generate rentals of 20,000 buckets at $3 a bucket the first year, and that rentals will grow at 7% a year thereafter. The price will remain a $3 per bucket.

Equipment requirements include:

Incorporated fee $2,500

ball dispensing machine $2,000

ball pick-up vehicle $8,000

tractor and accessories $8,000

All the equipment is 7-year ACRS property and is expected to have a salvage value of 10% of cost after 8 years.

Stocking a small shop selling tees, visors, gloves, towels, sun-block, etc., plus a checking account for the business make net working capital needs $3,000 to start. This amount is expected to grow at 5% per year.

Annual fixed operating costs are expected as follows:

Land lease $12,000

Water 1,500

Electricity 3,000

Labor 30,000

Seed & Fertilizer 2,000

Gasoline 1,500

Equipment maintenance 1,000

Insurance 1,000

Other 1,000

Total $53,000

Expenditures for balls and baskets, initially $4,000, are expected to grow at 7% per year. The relevant tax rate is 15% and the required return is also 15%. The project is to be evaluated over an 8-year life. Should the friends proceed?