1.3 (12 marks) Capital Investments Discounted cash flows Chapter 12

Brook Sorenson, the owner of a nine-hole golf course on the outskirts of Ottawa, Ontario, is considering the proposal that the course be illuminated and operated at night. Ms. Sorenson purchased the golf course four years ago for $90,000. Last years revenue for the 28-week season was $24,000 and total expenses were $16,500. The required investment in lighting the course is $20,000 consisting of 150 lamps and a generator.

Ongoing costs are as follows;

1. The 150 lamps consumed 1000 watts each. There are 1000 watts per one kilowatt.
2. Electricity to power the 150 lamps cost $0.032 per kilowatt-hour.
3. Expected average hours of operation per night are five.
4. Because of occasional bad weather it is estimated that the total number of nights in a year that golf will be offered is 130.
5. Labour for keeping the course open at night is $50 per night.
6. Lamp replacements are estimated at $300 per year.
7. Other annual maintenance costs to operate the night golf are estimated at 4% of the initial investment for years 1&2 and increasing to 5% of the initial investment for years 3,4,5.
8. Annual property taxes will increase due to the addition of night golf and this is estimated at 2% of the initial investment for years 1&2 and increasing to 3% of the initial investment for years 3,4 & 5.
9. Revenue from night golf is expected to be $140 per night of operation for Years 1 & 2 dropping to $110 per night for years 3,4 & 5.
10. The lighting equipment (lamps) has a salvage value of $7,000 at the end of year five.
11. Ms. Sorensons desires a 10% rate of return (discount rate).

Required:

You have been hired as an outside consultant to write a report to Brook Sorenson recommending whether she should proceed with the illumination of the golf course for night use. Your report should analyze the relevant quantitative (Net Present Value) and qualitative aspects of the decision and also consider any issues that will impact the decision.

Note:

1. Use the Present Value tables found on pages 756, 757 of your text for the Net Present Value calculations.