Spikes Volleyball Court

Topics: Net present value, Cash flow, Rate of return Pages: 5 (1584 words) Published: April 21, 2013
1) Perform a Business Sizeup
Spike’s Indoor Beach Volleyball and Rock Climbing Inc. caters to a niche market in the Canadian sports industry. As there were no indoor beach volleyball courts in Canada, Spikes faced little competition. The volleyball crazed locality of London, Ontario provided the perfect geographical location for the operations of Spikes. In addition to indoor beach volleyball courts, Spikes had also added an indoor rock climbing wall, a small restaurant with a bar, and had also upgraded the lighting, heating system, computer servers and had added a big-screen television in the lounge area. Spikes did face some competition in the rock-climbing wall division as there were 2 other competitors in the vicinity who offered similar services at comparable rates. Holistically speaking, the business was doing immensely well and faced little or no environmental threat apart from the fact that the premises was not owned by the business itself. It was leased from another person and was constantly at risk of zoning laws banning the establishment, as it was labeled as a high intensity residential area. This meant that the lease owner could cancel Spikes lease at any reasonable notice and construct high-rise apartment buildings in its place however Spikes reasoned that since there was no pressure from the neighborhood he would not face too much risk in this regard. As it is, the cost of a potential lease cancellation cannot be quantified and will affect the going concern of the business. Apart from that the business is in a very healthy condition, having around 130 regular teams per season that feed its main operations i.e. volleyball and Spikes has engineered various complementary services to squeeze more revenue out of its main operations which is mainly the restaurant bar and rock-climbing wall.

2) Analyze the expansion qualitatively.
The main aim of Misener was to encourage more people to stay after volleyball matches and games via the outdoor patio. Additionally the outdoor patio would be directly over the new outdoor beach volleyball court hence would create an area for the audience to sit, enjoy a match along with some drinks and refreshments which eventually will increase revenues and popularity. Having a 200 person capacity will provide enough room for spectators to enjoy a match without any congestion. Additionally, Misener has estimated that there will be 95 good weather days out of 120 days per season during which the patio can be open which implies an efficiency of around 80%. Having an extra court meant that four matches can be conducted per day meaning that Spikes can cater to around 8 more teams on a daily basis which will increase their operating revenues. The downfall of constructing this patio was that Misener was already facing a risk of his lease being cancelled and if the business were to construct an outdoor patio, residential complaints might increase as it will cause noise disturbance as well as littering from the patio. Spikes was in no position to face residential complaints as it could push his lease towards cancellation and he would have to locate another suitable premises to operate from which could essentially destroy his business. Lastly, the estimates provided by Misener are very optimistic and would require analysis from different projections to ensure that the expansion does remain viable in all possible scenarios.

3) List all the cash flows associated with the expansion, and classify them as relevant (cash, future and different), recurring or one-time costs.

Cash Flow| Relevant| Recurring or one time?|
Incremental bar revenue| Yes, Future cash flows| Recurring| Incremental food revenue| Yes, Future cash flows| Recurring| Additional league fees| Yes, Future cash flows| Recurring| Beverage COGS| Not relevant| N/A|

Food COGS| Not relevant| N/A|
5 days food inventory| Only applicable as a change in Net Working Capital which is valid for first year...
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