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DCF techniques to evaluate capital budgeting

D. Bogey, the owner of a nine-hole golf course on the outskirts of a large city, is considering a proposal that the course be illuminated and operated at night. Ms. Bogey purchased the course early last year for $480,000,. Her receipts from operations during the 28-week season were $135,000. Total disbursemets for the year, for all purposes, were $84,000.

The required investment in lighting this course is estimated at $94,000. The system will require 300 lamps of 1,000 watts each. Electricity costs $.08 per kilowatt-hour. The expected average hours of operation per night is five. Because of occasional bad weather and the probable curtailment of night operation at the beginning and end of the season, it is estimated that there will be only 130 nights of operation per year. Labor for keeping the course open at night will cost $75 per night. Lightbulb cost is estimated at $1,500 per year; other maintenance and repairs, per year, will amount to 4% of the initial cost of the lighting system. Annual property taxes on this equipment will be about 1.7% of its initial cost. It is estimated that the average revenue, per night of operation, will be $450 for the first two years.

Considering the probability of competition from the illumination of other golf courses. Ms. Bogey decides that she will not make the investment unless she can make at least 10% per annum on her investment. Because of anticipated competiotion, revenue is expected to drop to $300 per night for years 3 through 5. It is estimated that the lighting equipment will have a salvage value of $35,000 at the end of the five-year period.

Using DCF techniques , determine wether Ms. Bogey should install the lighting system

Solution Preview

The investment decisions of a firm are generally known as the capital budgeting, or capital expenditure decisions. The firm's investment decisions would generally include expansion, acquisition, modernization and ...

Solution Summary

This provides the steps to use DCF techniques to evaluate capital budgeting

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