Spike's Indoor Beach Volleyball and Rock Climbing Inc. take into account a specialty advertise in the Canadian games industry. As there were no indoor shoreline volleyball tournaments courts in Canada, Spikes confronted little rivalry. The volleyball crazed area of London; Ontario gave the ideal geological area to the operations of Spikes. Notwithstanding indoor shoreline volleyball courts, Spikes had likewise included an indoor shake climbing divider, a little eatery with a bar, and had additionally updated the lighting, warming framework, PC servers and had included an extra large flat screen TV in the parlor range.
As a result, cash flows for the entire life of the project are calculated and the NPV of the project comes out to be $2,647,878.40 indicating the expansion will create value of over $2 million. The payback period is less than a year, around 34 days as incremental revenues are vast and the initial outlay is only $43,500. The return on investment, more commonly known as internal rate of return or IRR, comes out to be 872%.
5) As Earl Misener, would you go ahead with the expansion?
Earl Misener should not go only by the numbers which seem too good to be true. In fact, they are too good to be true as one critical factor has not been quantified i.e. the potential risk of losing the lease due to the expansion. If Misener loses the lease then not only will the expansion be redundant, he will have to locate his business elsewhere which for a business like Spikes will spell certain death. The location is gold as it is situated away from competitors who lower competitive risk and is located near residential areas making it easier for his customers to commute to Spikes. As Earl Misener, he should analyze his fall-back plans and strategies on how to ensure the lease does not get canceled. If possible, Earl should also try to buy the premises instead of relying on a lease. In my opinion, it is too soon to expand and Earl should solve the lease problem before expanding. As a result, cash flows for the entire life of the project are calculated and the NPV of the project comes out to be $2,647,878.40 indicating the expansion will create value of over $2 million.
Cash Flow Analysis
Total Cash Flows
NPV @ WACC
Data and Assumptions
Capital Expenditure for Expansion
Incremenetal Revenues for Expansion
Incremenetal Expenses for Expansion
- Perform a business size-up.
- Analyze the expansion qualitatively.
- List all the cash flows associated with the expansion, and classify them as relevant (cash, future and different), recurring or one-time costs.
- Perform a differential analysis, with sensitivity analysis where necessary. What is the return on investment? What is the payback period?
- As Earl Misener, would you go ahead with the expansion? CASH FLOW RELEVANT? RECURRING OR ONE TIME? Incremental bar revenue Incremental food revenue Additional league fees Beverage COGS Food COGS 5 days food inventory 5 days liquor inventory Accounts payable Accounts receivable Servers Bartender Cooks Maintenance Utilities Insurance Nets and balls Retaining wall/fencing Zoning and permits Stairway Patio furniture Washroom Amortization Bank loan Interest