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1. Fun in the Sun, Inc. is a firm that creates once-in-a lifetime travel experiences for graduates before they start working. Fun in the Sun, Inc. has seen tremendous growth as regulation has decreased and banks and consulting firms have increased signing bonuses. Its clients are currently concentrated in the Tri-State area. It is contemplating expanding into New England and accesses the risk of the new venture to be similar to that of the existing company. Your RBS summer intern created a summary for Fun in the Sun, Inc. in the New England market over the next 5 years: Revenue is expected to be $6.0 million in the 2019 (year 1) and grow 12% in 2020, 10% in 2010 and 8% per year for each of the next 2 years. Variable cost is expected to be 58% of revenue. Fixed cost (excluding depreciation) is expected to be $2,700,000 each year. Depreciation expense is expected to be $120,000 each year. Maintenance capex is expected to be $260,000 each year. No change in Net working capital is expected. Taxes are projected to be 20%, due to the recent legislative changes. Initial start-up expenditures today are estimated to be $6,000,000. This project will hopefully continue forever. Assume the long-term perpetual growth rate is 3.5%. . . Additionally, here is a summary of the capital structure for Fun in the Sun, Inc.: Capitalization Table Units Annual Book Value Share Outstanding Coupon Rate Subordinated Debentures $ 4,000,000 $ 950 4,000 7.5% Common stock $ 8,000,000 $ 8 1,200,000 Price per Term 5 Other info: Beta Treasury bills yield EC) on market 1.10 3.5% 10.0% Do you recommend expanding into the New England? Why or why not? Hint: Step 1: Calculate the free cash flow Step 3: Calculate the NPV Step 2: Calculate the cost of capital Step 4: Recommend decision and rationale ANSWER - WACC = 9.62%; NPV = - $528,807 + Qualitative Explanation 1. Fun in the Sun, Inc. is a firm that creates once-in-a lifetime travel experiences for graduates before they start working. Fun in the Sun, Inc. has seen tremendous growth as regulation has decreased and banks and consulting firms have increased signing bonuses. Its clients are currently concentrated in the Tri-State area. It is contemplating expanding into New England and accesses the risk of the new venture to be similar to that of the existing company. Your RBS summer intern created a summary for Fun in the Sun, Inc. in the New England market over the next 5 years: Revenue is expected to be $6.0 million in the 2019 (year 1) and grow 12% in 2020, 10% in 2010 and 8% per year for each of the next 2 years. Variable cost is expected to be 58% of revenue. Fixed cost (excluding depreciation) is expected to be $2,700,000 each year. Depreciation expense is expected to be $120,000 each year. Maintenance capex is expected to be $260,000 each year. No change in Net working capital is expected. Taxes are projected to be 20%, due to the recent legislative changes. Initial start-up expenditures today are estimated to be $6,000,000. This project will hopefully continue forever. Assume the long-term perpetual growth rate is 3.5%. . . Additionally, here is a summary of the capital structure for Fun in the Sun, Inc.: Capitalization Table Units Annual Book Value Share Outstanding Coupon Rate Subordinated Debentures $ 4,000,000 $ 950 4,000 7.5% Common stock $ 8,000,000 $ 8 1,200,000 Price per Term 5 Other info: Beta Treasury bills yield EC) on market 1.10 3.5% 10.0% Do you recommend expanding into the New England? Why or why not? Hint: Step 1: Calculate the free cash flow Step 3: Calculate the NPV Step 2: Calculate the cost of capital Step 4: Recommend decision and rationale ANSWER - WACC = 9.62%; NPV = - $528,807 + Qualitative Explanation

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