Crystal Meadows of Tahoe, Inc Introduction Crystal Meadows of Tahoe (CMOT) is a holding company for two different ski resorts. The majority of revenues from this company come from the sale of lift tickets, ski rentals, skiing lessons, and food and beverage sales; revenues are also primarily generated during the winter months. CMOT has recently partnered with Toiyabe Resort Company for the development of a year-round ski resort in the Tahoe area, and have invested $5,300,000 in the venture. CMOT and Toiyabe plan to begin construction of the resort in 1992.
CMOT also plans to invest $8,200,000 in their two ski resorts (Lake Ridge and Crystal Meadows) in 1992. During 1991, CMOT saw very positive increases to net income and shareholder’s equity. This year was exceptional in terms of operations, bringing CMOT the most skier days in the company’s history. CMOT is planning some significant capital investments in 1992. An analysis of their income statements, balance sheets, and cash flow are helpful in guiding the company’s proposed investments. What does the analysis of cash flows reveal about CMOT that was not evident from analysis of the income statements and balance sheets?
The income statement for CMOT for 1991 has the company showing a net income of $1,418,000. This figure is $747,000 higher than the previous year at $671,000 and more than doubles CMOT’s net income from 1990 to 1991. CMOT’s balance sheet for 1991 indicates that the company had $7,585,000 in retained earnings, which is $1,306,000 higher than 1990’s $6,279,000. Both provide bottom lines that make the CMOT appear to be profitable and in a growth cycle. An analysis of cash flows shows that CMOT has significant cash outflows for capital investments in PP&E, namely the purchase of new snow making equipment and other improvements.
These outflows are nearly equivalent to cash taken in over the same period. In 1991, CMOT had $5,425,000 in net cash provided by operating activities. During the same period, CMOT had $5,045,000 in net cash used in investing activities. These investments brought CMOT’s net increase in cash and equivalents to $825,000, which is roughly 25% of $3,272,000 of cash carried over from the previous year. Will Crystal Meadows of Tahoe be able to finance its planned 1992 capital investment program with cash provided by operations during that year?
During the 1991 fiscal year, CMOT saw better skiing conditions for more days than in its previous history. Given that the majority of revenues at CMOT come from operations including, lift tickets, ski rentals and lessons, and concessions, it is not guaranteed that CMOT will see similar revenues in 1992. CMOT is proposing capital investments of $8,200,000 for 1992. All else remaining equal, including cash taken in from operations and stability in other expenses, this proposed capital expenditure will negatively impact cash flow and decrease cash on hand for 1992 by nearly 75%.
It would be possible for CMOT to finance their capital investment program with cash provided from operations, but not with cash provided from 1992’s operations alone. If these investments are made completely from cash, and finance sources are not utilized, there will be a significant increase in CMOT’s assets, which will in turn have a positive effect on shareholder’s equity, since there will not be any further liabilities assumed by the company. There will also be stresses placed on CMOT’s liquidity, which cannot be fully gauged until revenues from the Toiyabe investments come to fruition.
Conclusion If the aim of an organization is to turn a profit—for shareholders and to secure future operations, then it would be advisable for CMOT to make their proposed 1992 capital investments. There is some risk involved with the venture, namely that the Toiyabe venture will create further competition in the market and that 1991 was an exceptional year for CMOT in terms of cash received from operations and skier days; however, leaders have an obligation to assist their organizations in facilitating a vision of growth and providing results for the company.
Leaders also have the duty of responsibility to those persons their organizations have formed relationships (shareholders, employees, etc. ) and should be cautious of investments that propose overly aggressive and risky growth for their companies. In this case, CMOT has the option of providing a year-round revenue source and upgrading their current facilities. Both of these investments will be beneficial for the company, and should be undertaken by CMOT.