Prairie Venture Limited Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

1. Evaluate the potential investment in Crestline. What are the opportunities and risk facing Crestline?
Evaluation of Potential Investment
We can evaluate the potential investment in Crestline Coach Ltd by analyzing it on the grounds of quantitative and qualitative data. For the quantitative analysis, we calculate the value of the company throughEBITDA multiple methods and we also calculate the IRR of the company so that we can compare it with the required return rate of the company.However, in thequalitativeanalysis, we determine the risk and opportunities which shouldbe considered by Prairie Ventures Limited (PVL) before the investment so that the company can evaluate itsfuture.
Quantitative Analysis:
EBITDA Method:
EBITDA method is used to determine the enterprise value (i.e. market capitalization).In this method, we first determine the EBITDA multiple which is a financial ratio then multiply this multiple with the EBITDA of the company. In our calculation, we conclude that the value of the company using EBITDA multiple of 4.5 is approximately 43.5 million. See Exhibit 1
Free Cash Flow Method:
Under this method, we can evaluate the value of the company using the present values of its cash flows. In this method, we first estimate the future cash flows then discount these cash flows with an appropriate discount rate such as WACC.
The value of Crestline Coach Ltd using free cash flow method is approximately 13.1million, in calculating this value, we take the five years forecasted data and assume the required capital expenditure is 3% of total sales revenue and the terminal growth rate is equal to the growth rate of the GDP. Moreover, we also assume the WACC of the company is 12%.
Prairie Venture Limited Harvard Case Solution & Analysis
Required Rate Return:
To calculate the rate of return of the investment we use the IRR method. IRR is defined as the interest rate which is considered as the breakeven point, at this point all cash flows positive cash flows and negative cash flows become equal means and show a zero value of the project.
By using forecasted data and stated assumption (describe in free cash flow method) we conclude that the IRR of the project is approximately 11%.
Concern:
After the quantitative analysis, we can conclude that the value of Crestline Coach Ltd is an appealing one, therefore, thecompany should invest in it, however, IRR of the investment is much lower than the required return rate of the company which may reluctant the PVL. The IRR is based over the forecasted data, therefore, it is possible that actual IRR of the project differs from the calculated one, therefore, a holistic view over the projection should be conducted before taking any decision.
Qualitative Analysis:
To conduct the qualitative analysis,we determine the opportunities and risks which are related to this investment.
Opportunities:
Crestline Coach Ltd has many opportunities to enhance or grow its business.Some of the opportunities which can be grasped by the company are described as follows:
In Manitoba, Crestline moves towards centralizing buying behavior, this enables the company to obtain 100% market share. Crestline has an opportunity to nurture its growth by changing its buying behavior from centralized to decentralized buying behavior.......