SHOULD THE SCUBA BUSINESS DIVE INTO THE EXPANSION? Harvard Case Solution & Analysis

Question No. 1:

What are the advantages of the proposed dive shop?

Answer:

Advantages of the Dive Shop:

The proposed plan of the expansion was introduced after the inspection of the capacity utilized. Currently the company was underutilizing its current resources and decided to expand its business by introducing new dive shop at more decent and desirable location in order to bring back the company profitable.

On the other hand, Don Foster’s Dive Company wanted to generate good returns from the investment in order to open another dive shop. By this investment, the company can make something out of it’s over investment in the fixed assets and inventories.

Question No. 2:

What are the disadvantages of the proposed dive shop?

Answer:

Disadvantages of investing in Dive Shop:

We are aware of few advantages of investing in the dive shop, but there were some disadvantages which should not be over looked. The estimation must be accurate, because if the estimation and expected values go wrong, then the investment will be disastrous for the company, as they were already in troubles in terms of financial performance.

The risk of location was yet another problem for Don Foster’s Dive Company. In case of miss allocation of the asset in another dive shop, the company would go far below than its current condition.

As the company was already facing trouble in financial terms as compared to its competitors, so the company can go for the diversified business which would result in making its line of services vaster.

Question No. 3:

Project a pro-forma income statement, balance sheet, and statement of cash inflows and outflows for fiscal 1997 and 1998 for only the new location, using the information presented in the case.  Present the financial in Cayman Island dollars; do not translate into US dollars. The fiscal year starts June 1 and ends May 31.

    1. Clearly show how your projected revenues. Hint: use the regression equation shown in exhibit 3 to project revenues, but not profits, and adjust to the circumstances of the new shop.
    2. State clearly any assumptions that you make to complete the financial statements.

Answer:

Based on the projected data and professional evaluation, we have calculated the Pro-Forma Income Statement, Balance Sheet and the expected Statement of Cash Flows. In the income statement projection, we have assumed the operating expenses as 86% of the total revenues, i.e. the average operating expenses to revenues of the historical data. In both years the company can earn good profit margins.

In case of the projected balance sheet, the company is below as compared to its historical data. Cash flows, on the other hand, were negative in the first year, because of the early investments, but in the next year, it was positive. Refer to the appendices.

Question No. 4:

In your opinion, should Don Foster open the new shop?  Why or why not?

Answer:

Based on our evaluations of the estimated numerical values and our professional and reasonable judgments and assumptions, it is advised to Don Foster’s Dive to go for the investment in another dive shop, as on the basis of the income statement and cash flows, the company would be a better subject to the authentication of the projected data and estimations.....................

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