SPM 5506: Application Golf Course Case Study

Overview

You are the financial manager of a recently built, 18-hole, golf course evaluating the possibility of an investment in golf carts. You need to apply the steps of capital budgeting to make this decision.

Learning Objectives

By the end of this assignment, students will be able to

Conduct a capital budget for a capital project.

Evaluate capital projects and make recommendations to sport organizations using capital budget data.

Instructions

You will complete this assignment by following the steps below. You do not need to use Excel, but it is encouraged. You are able to work together with other students using Canvas, file share, and email. You can also use other software like Google hangout or Zoom.

Grading and Evaluation

You will receive full grades so long as you make a genuine attempt to answer the questions. Even if you get the answer wrong, you will get full marks, so long as you make a genuine attempt. Think of this as a chance to practice your new knowledge... and have fun!

Case Study

You are the financial manager of a recently built, 18-hole, golf course. The course was originally designed for people to walk around. Green fees were $25, the course averaged 20 rounds a day, and it was open for 300 days during a year. You anticipate the same performance in the coming years.

However, the owner has asked you to evaluate a capital expenditure of 10 golf carts. The golf carts cost $8,000 each and have a useful life of 10 years, after which they can be sold for $1,000 each (straight line depreciation will apply). To make the course golf cart friendly, you will need to pave parts of the course ($40,000) and build storage and a charging facility ($20,000). You will not sell anything after gaining the carts.

You anticipate increasing the number of rounds played to 24 a day with the carts. You also expect to rent out 20 carts a day at $5. However, these revenues will be offset by electricity and maintenance costs, which are $5,000 and $20,000 per year respectively.

To purchase the carts, you plan to take out a loan at 9% interest. Your tax rate is 21%.

1. Should the golf course invest in the golf carts? Show your working.

2. The owner has come to you explaining that she needs the project to turn a profit in three years so she can manage the debt obligations of the business. Should she still invest in the golf carts? Show your working and explain.