Topic: corporate finance case study

Preparatory Questions
1) Lease option
a. What are the relevant costs and benefits of leasing the additional space to Diamond Events?
b. Are any costs or benefits irrelevant?
c. What is the NPV of leasing the additional space to Diamond Events?
d. What is the IRR?
e. Do the NPV and IRR decision making rules agree?
f. Sensitivity analysis
i. Construct a cost of capital sensitivity table for all valuation types with costs of capital
ranging from 11% to 15% in increments of 0.5%. That is fill in the following chart:
LEASE OPTION COST OF CAPITAL SENSITIVTY
Cost of Capital 11.0% 11.5% 12.0% 12.5% 13.0% 13.5% 14.0% 14.5% 15.0%
NPV
ii. Construct 3×3 NPV and IRR Sensitivity Analyses reflecting the following information
LEASE OPTION NPV SENSITIVITY
Increase in repairs, maintenance, and utilities
7,500 15,000 22,500
Decrease in
restaurant sales
4%
8%
12%
Professor
2) Build option – Outcome A: Cease operations
a. What are the relevant costs and benefits of starting the brewery?
b. Are any costs or benefits irrelevant?
c. What is the NPV of starting the brewery?
d. What is the IRR?
e. Do the NPV and IRR decision making rules agree?
f. Sensitivity analysis
i. Construct a cost of capital sensitivity table for all valuation types with costs of capital
ranging from 11% to 15% in increments of 0.5%. That is fill in the following chart:
Build OPTION COST OF CAPITAL SENSITIVTY
Cost of Capital 11.0% 11.5% 12.0% 12.5% 13.0% 13.5% 14.0% 14.5% 15.0%
NPV
i. Construct 3×3 NPV and IRR Sensitivity Analyses reflecting the following
information
BUILD OPTION (A) NPV SENSITIVITY
Brewing ingredient costs
30% 40% 50%
Increase in restaurant
sales
0%
15%
30%
3) Assuming the worst outcome for the craft brewery project (outcome A), which option should Upland
choose: do nothing, lease to Diamond event, or open craft brewery? Why?
4) Assuming a good outcome for the craft brewery (outcome B), which of the two options (B.1. or B.2.)
offers most value?
Executive Summary
Prepare a short (less than 1 page) executive summary that lays out major assumptions you used and what
decision you have arrived at: should you go ahead with the leasing option, the craft brewery option, or leave
the small building idle?

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