A Virginia-based entrepreneur believes that joining Kinloch Golf Club will allow for profitable networking opportunities, thus improving her business. But she wonders if it is worth the costs of joining. If she joins, she thinks that her company's free cash flow to equity will increase 11% a year for 20 years, when she plans to retire and dissolve the business.
If she does not join, she thinks that free cash flow will only increase 5% per year for 20 years. Assume the initiation fee at Kinloch is $150,000, with annual dues of $15,000 (due at the end of each year). The entrepreneur had free cash flow of $50,000 last year (year 0), and the appropriate discount rate is 15%. Ignore any utility she receives from the enjoyment of golfing, the terminal value of her business, taxes, and assume the Kinloch membership is?
non-equity (no residual value).
From a pure economic standpoint, is this a good investment for her business Select True if she should?
The value that a business is expected to gain if it continues forever is known as residual value. It can be computed using the required rate of return and the constant growth rate. It is also known as Terminal or horizon Value.
Answer and Explanation: 1
The entrepreneur should not invest in Golf Club membership since the net benefit is more without membership as shown below:
In case the...
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fromChapter 8 / Lesson 3
Learn how to find present value of annuity using the formula and see its derivation. Study its examples and see a difference between Ordinary Annuity and Annuity Due.