Location: Watertown, MN
Timber Creek Golf Course is located in Watertown, MN. It is currently for sale with a price tag of $1,495,000. It is located on the west banks of Lake Minnetonka, and 30 miles west of the Minneapolis/St. Paul area. It currently has 18 holes on 143 acres, a clubhouse measuring 2,600 sq ft, and 45 golf carts available to rent. We have prepared a pro forma income statement, balance sheet, and a statement of free cash flows. We also calculated the weighted average cost of capital and the internal rate of return assuming a thirty-week season for an investment period of ten years. Furthermore, we have valued this project using cash flows based on a “strong market,” a “weak market,” and a “neutral market.” The biggest assumption made in our projections is the number of tee times per week; therefore, the different markets are calculated assuming different numbers of tee times. The value of this project is the weighted average of the net present value of the future cash flows assuming a 40% probability of a strong market, 40% probability of a neutral market, and 20% probability of a weak market. If the market is weak, the investor would prefer to mitigate against future losses, so we have also provided an option to sell the course midway through the forecast.
A full list of the assumptions we used is at the bottom of the forecast. These assumptions can be adjusted easily based on changes in the market or further research. We assumed an 80/20 debt to equity ratio to finance this investment, which provides a weighted average cost of capital of 6.53%. This investment will bring an internal rate of return of 7.30% in a strong market, 6.52% in a neutral market, and 4.27% in a weak market.
We found most of the expenses in this investment to be fixed, especially the utilities and grounds-keeping, because of needed maintenance regardless of weather. Some of the labor costs are variable, but a majority of the labor is fixed as well. Also, in order to continue operations, there is a mandatory capital expenditure midway through the forecast to expand the clubhouse. The majority of revenue is from tee time sales and season pass sales. The revenue from season passes will be consistent from year to year based on the loyalty of our members, but the tee time revenue will fluctuate significantly based on the weather variable. There will also be some revenue from sales in the Pro Shop and from the restaurant facilities in the clubhouse.
Based on the assumptions we made, we calculate the value of this investment to be $1,650,000 with the option to sell in case of a weak market. The value without the option is $1,594,000, which means that the price of the option is approximately $56,000. Therefore, we argue that this project is underpriced by $155,000.