Required Questions

1.What are the future incremental cash flows of the two alternatives being considered?

2.Evaluate the two options using appropriate capital budgeting tools (NPV and payback)

3. Which would you recommend if you were Webb/Stauffer? Why

CREDIT VALLEY GOLF AND COUNTRY CLUB Stephen Rene Frey wrote this case under the supervision of Professor Mary Hei'sz soieiy to provide materiai for ciass discussion. The authors do not intend to iiiustrate either eh'ective or inehective nandiing ot a manageriai situation. The authors may have disguised certain names and otheridentiiyingini'onnation to protect condennfaiiiy. tlrejr Management Services prohibits any form of reproduction, storage or transmittai without its written permission. Reproduction of this materiai is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materiais, contact hrey Pubiishing, ivey Management Services, no Richard ivey Schooi oir Business, The University of Western Ontario, London, Ontario, Canada, nan 3K7; phone (519) 6613208; rax (519; 6613882,' ernaii nsesQiueyuwuca. Copyright o 2003, they Management Services Version: (A) 20031127 In early January 2008, Credit Valley Golf and Country Club (Credit Valley), a private golf course located in Mississauga, Ontario, was preparing for the anruial general meeting with the board of directors and the club's membership. Ian Webb, general manager of Credit Valley, and Jeff Stauffer, superintendent, felt the most pressing issue was an upgrade and change to the method of irrigation being used by the course. Newly passed government regulations had created a need for a major change in the irrigation system, a change that would cost the club close to $425,000. The annual general meeting was being held on February 28, 2008, so the proposal had to be completed quickly. GOLF INDUSTRY IN CANADA The golf industry in Canada was large and growing in 2008. The total revenue derived from the golf industry was projected to be $12.9 billion dollars. The spending was spread out over a variety of areas, the largest of which was green fees at $7.25 billion or 59 per cent of all expenditures. Golf equipment, golf apparel and golf travel were the next three largest expenditures, each accounting for 13 per cent to 18 per' cent of the total industry. The golf participation rate in Canada was 21.5 per cent of the population, making the total market of close to 5.95 million people.1 In Ontario, the golf industry was the largest in Canada with the total number of golfers in 2006 reaching approximately 2.3 million2 Ontario also had the most golf courses with over 800 courses 3to choose from. In general, green fees had stayed at over the period from the mid-1990s until 2008. The golf industry had shown major changes during the last 50 years. In the United States, there had been a dramatic shift in the type of golfcourses that were being opened. In 1950, the percentage of private clubs in the industry was 62 per cent, but by 2005, the private clubs had decreased dramatically to only 27 per cent.4 The Canadian industry followed a similar trend towards fewer private clubs and more public clubs. The annual success of the golf industry was heavily affected by the weather. The seasons in Canada were highly cyclical, so the majority of money was made during the peak months of July and August. For example, cool and wet conditions during the spring and summer of 2004 in many parts of Canada contributed to reductions in the number of rounds played. In southern Ontario, the poor weather conditions led to a reduction in rounds played by as much as 20 per cent at some courses.5 CREDIT VALLEY GOLF AND COUNTRY CLUB Credit Valley Golf and Country Club (Credit Valley) was a private golf club located in Mississauga, Ontario. Founded in 1930, the club orig'nally opened as a six-hole golf course called The Willow, and over its 78-year life, the course had undergone many changes. During the early years of the club, it had switched back and forth between a private and public club a few times, and the course itselfhad survived the ravages of a hurricane in 1956. Credit Valley was a high-end, 18-hole private golf course that enjoyed a full membership and a strong nancial base. Approximately 20 people were on the waiting list for membership. In 2008, Credit Valley was listed on Score Golf's Top 100 Golf Courses in Canada. CURRENT ISSUE Credit Valley had always been able to irrigate the course by pumping water directly 'om the Credit River in Mississauga at no cost. In 1990, the Liinistry of the Environment (MOE) enacted the Ontario Water Resources Act (OWRA), and within this Act, the Ontario Taking and Transfer regulation was put in place to govern the taking of water from Ontario rivers. The MOE created the OWRA to ensure that it protected Ontario's valuable 'esh water resources. It covered the use of water, delivery of drinking water to the end consumer and potential pollution of groundwater. As environmental issues became more of a political issue, the OWRA continually increased their standards and tightened their restrictions. Stiff nes were enacted on consumers and corporations that were in violation of the OWRA. Based on the amount of water required to irrigate its golf course, Credit Valley required a permit to take water 'om the Credit River. In the past, the MOE had permitted Credit Valley to pump up to 1,000 gallons per minute, but in 2006, that amount was reduced to only 435 gallons per minute. The MOE did, however, allow a transitional permit at 1,000 gallons per minute for Credit Valley until March 2009, which would allow the course time to make the necessary changes. The course's superintendent, Je' Stauffer, concluded that there were two alternatives. He could make some course alterations and build a new pump house, or he could use municipal water as a long-term solution for irrigation of the golfcourse. Alternative 1: Building a New Pump House The scope of work involved in building a new pump house included expansion of the pond; adjustments to the irrigation system in the area of the pond expansion; new water lines to service the pond for supply and demand; a new wet well and a pump house next to the 10th tee; a new, larger pipe from the pump house to the top bench of golf course; and restoration of all the aected areas. Over the summer months, a golf course in southern Ontario could use between 11 million gallons and 26 million gallons of water, depending on the rainfall and climate of the summer months. During the average summer, the course would need approximately 22 million gallons. With the changes made to the pond, the course and the pump house, StauEer knew that he could use the pond as a mechanism to store the excess water pumped from the river during low usage periods, which could then be used in high water usage periods. COSTS OF THE PUMPHOUSE In order to make the required changes, Stauffer and Webb knew they would need to the get the resolution passed by a two-thirds majority of the membership. Stauffer planned to ask the club's membership to approve a capital expenditure of $425,000 for the project. The money would be split among the di'erent aspects of the expansion. The new pumping equipment was expected to cost around $105,000 for four new vertical turbine pumps and the pumping station. The new pumps were hydro-friendly, but Smuer expected that with the increased workload, the club's electricity costs would increase by close to $2,000 per month during the operating season, which ran 'om April until November. Stau'er also estimated that the new pumps would last close to 10 years with a salvage value of only $10,000. The new pump house structure would cost approximately $20,000. In addition to the xed costs of equipment and buildings, a signicant amount of money was going to be spent on the eng'neering of the new site and fees. Stauffer estimated these costs at an additional $180,000. The remaining $120,000 would be spent on the landscaping and restoration of the aEected areas. Overall, Stauffer knew the project would be expensive but felt that it was probably cheaper then moving to municipal water Alternative 2: Using Municipal Water If Credit Valley did not build the new pump house, its water supply would have to be supplemented with water purchased from the municipality. In order to tap into the municipal water system, the up-front costs to Credit Valley would be about $150,000 to put in the appropriate plumbing. In addition to the necessary plumbing costs, the course would have to pay for the actual water itself. With a permit for 435 gallons per minute, Stauffer felt that municipal water would have to be used to provide half the water required by the course. He estimated the cost per gallon at $0.007 per gallon; however, he also knew that both the cost of water 'om the municipality and the water requirements for the course could change dramatically at any time. Although Credit Valley was a private club that was structured as a not-forprot corporation, StauEer had worked for a public club in the past, so that he knew the pumps and the pumping station would classij for a capital cost allowance of 30 per cent per year. The typical course would pay an average of 22 per cent income tax. FINAL DECISION Although StauEer and Webb felt convinced that the new pump house was the best course of action for the club, they knew that they would have to convince their membership to sign onto the idea. They felt that if they could show a 20 per cent return, the membership would quickly pass the motion. Webb and Stauffer knew they needed to get started on construction soon to be ready for the upcoming season, so they settled in to prepare a thorough and convincing business plan to present at the upcoming annual general meeting. Required Questions 1. What are the future incremental cash flows of the two alternatives being considered? 2. Evaluate the two options using appropriate capital budgeting tools (NPV and payback) 3. Which would you recommend if you were Webb/Stauffer? Why