Question

You are considering developing an 18-hole championship golf course that requires an investment of $25,000,000. This investment cost includes the course development, club house, and golf carts. Once constructed, you expect the maintenance cost for the golf course to be $620,000 in the first year, $685,000 in the second year and continue to increase by $65,000 in subsequent years. The net revenue generated from selling food and beverage will be about 18% of greens fees paid by the players. The cart fee per player is $19, and 42,000 rounds of golf are expected per year. You will own and operate the course complex for 7 years and expect to sell it for $31,000,000. What is the greens fee per round that will provide a return on investment of 18%? Assume that the greens fee will be increased at an annual rate of 4%. Click the icon to view the interest factors for discrete compounding when i = 4% per year. Click the icon to view the interest factors for discrete compounding when i = 18% per year. The greens fee that will provide a return on investment of 18% is $ cent.) per round. (Round to the nearest

Answer 1

Based on the given data, pls find below steps, workings and answer:

The Greens fee that shall provide the rate of return of 18% shall be $ 73.03 per round; This is calculated using GOAL SEEK option in excel;

Step 1: Assumed that the Greens Fee is $ 100 per round; Then the NPV is calculated; Based on this NPV, and using the Goal Seek option, the Greens Fee is calculated;

Step 2: To reassure, pls find below calculations using Greens Fee at $ 73.03, instead of assumed fee of $ 100; You may observe, the NPV is 0.

1 2 3 4 5 6 7 Terminal 0 2,50,00,000 Golf Course ($) Initial Cost Sale Value No.of Rounds Cart Fee Greens Fee 3,10,00,000 42,000 19 42,000 19 104 42,000 19 42,000 19 112 42,000 19 117 42,000 19 122 42,000 19 100 108 127 Revenue - Cart Fee Revenue - Greens Fee Revenue - Food and Beverages Maintenance Costs 18% 7,98,000 42,00,000 7,56,000 6,20,000 51,34,000 7,98,000 43,68,000 7,86,240 6,85,000 52,67,240 7,98,000 45,42,720 8,17,690 7,50,000 54,08,410 7,98,000 47,24,429 8,50,397 8,15,000 55,57,826 7,98,000 49,13,406 8,84,413 8,80,000 57,15,819 7,98,000 51,09,942 9,19,790 9,45,000 58,82,732 7,98,000 53,14,340 9,56,581 10,10,000 60,58,921 EBIT 3,10,00,000 Total Cash Flows Discount Factor @ 18% Discounted Cash Flows -2,50,00,000 1.0000 -2,50,00,000 56,03,396.67 51,34,000 0.8475 43,50,847 52,67,240 0.7182 37,82,850 54,08,410 0.6086 32,91,725 55,57,826 0.5158 28,66,665 57,15,819 0.4371 24,98,437 58,82,732 0.3704 21,79,149 60,58,921 0.3139 19,02,047 3,10,00,000 0.3139 97,31,676 NPV Break even Revenue: Using GOAL SEEK Option NPV Greens Fee Per Round 0 73.03 0 1 2 3 4 5 6 7 Terminal 2,50,00,000 3,10,00,000 Golf Course ($) Initial Cost Sale Value No.of Rounds Cart Fee Greens Fee 42,000 19 42,000 19 76 42,000 19 42,000 19 82 42,000 19 85 42,000 19 89 42,000 19 92 73 79 Revenue - Cart Fee Revenue - Greens Fee Revenue - Food and Beverages Maintenance Costs EBIT 18% 7,98,000 30,67,244 5,52,104 6,20,000 37,97,348 7,98,000 31,89,934 5,74,188 6,85,000 38,77,122 7,98,000 33,17,532 5,97,156 7,50,000 39,62,687 7,98,000 34,50,233 6,21,042 8,15,000 40,54,275 7,98,000 35,88,242 6,45,884 8,80,000 41,52,126 7,98,000 37,31,772 6,71,719 9,45,000 42,56,491 7,98,000 38,81,043 6,98,588 10,10,000 43,67,630 3,10,00,000 Total Cash Flows Discount Factor @ 18% Discounted Cash Flows NPV -2,50,00,000 1.0000 -2,50,00,000 -0.03 37,97,348 0.8475 32,18,092 38,77,122 0.7182 27,84,489 39,62,687 0.6086 24,11,814 40,54,275 0.5158 20,91,150 41,52,126 0.4371 18,14,932 42,56,491 0.3704 15,76,738 43,67,630 0.3139 13,71,109 3,10,00,000 0.3139 97,31,676

Computation of Net Present Value (NPV) based on the Discounted Cash flows; The Discounting factor is computed based on the formula: For year 0, the discounting factor is 1; For Year 1, it is computed as = Year 0 factor /(1+discounting factor%) ; Year 2 = Year 1 factor/(1+discounting factor %) and so on;

Next, the cashflows need to be multiplied with the respective years' discounting factor, to arrive at the discounting cash flows;

The total of all the discounted cash flows is equal to its respective Project NPV of the Cash Flows;