Net present value. Lazy Links Country Club has been more successful than expecte
ID: 2331183 • Letter: N
Question
Net present value. Lazy Links Country Club has been more successful than expected in the 3 years since it opened. The owners believe that this growth will continue for 10 years before leveling off. The pool, racquet, and golf facilities (both indoor and out) can be expanded during each sport's off-season. However, the locker rooms, sports shop, and dining facilities are used year-round. These facilities are approaching capacity (4 years sooner than pro- jected), so an expansion is required. If all of the work is done immediately, it will cost $4.5M to build and $0.6M per year to maintain. If capacity is matched to the 5-year fore- cast, then the capital cost will be $2M now and $5M in 5 years. (These cost estimates in- clude a "cost of disruptions") For the staged alternative, maintenance costs are estimated to be $0.2M and $0.6M before and after expansion, respectively. If the owners' interest rate is 12%, what is the present worth of each option over the next 5 years? Will costs after 5 years make a difference?Explanation / Answer
Solution.
1. what is the present worth of each option over the next 5 years.
Option first.
Option second.
Q2.
Yes cosst after five year will make difference.
Option first cost = $6,300,260
option second cost = $5,377,440
Difference = $944,820.
Year Cash flow Table value at 12% PW 0 4,500,000 1.0000 4,500,000 1 600,000 0.8928 535,680 2 600,000 0.7971 478,260 3 600,000 0.7117 427,020 4 600,000 0.6355 381,300 Total worth 6,322,260