Golf Course installing a new Automatic Sprinkler System The eighteen-hole Redwood Golf Course is in need of a new sprinkler system, which is estimated to cost $1 million. The Golf Course Superintendent, who is in charge of maintaining the golf course, has advised the members that the system must be replaced within the next year because the system is beginning to fail. The board of directors has known about this problem for several years but has been putting off the repair due to the cost. The members, however, have been complaining because the condition of the course is deteriorating. After looking into the matter further, the Board estimates that the property has lost nearly $250,000 in incremental profits over the past year alone due to membership terminations and lower guest fees and golf shop sales. If this problem is not solved quickly, more members will leave and revenues will continue to decrease. Mr. Hans Tripler, general manager of Redwood, has requested a loan for $1 million from a local bank. The bank has offered to grant the loan at a 6.5% interest rate for a term of ten years.
QUESTIONS
1. Calculate the annual payment on the loan.
2. Calculate the payback period on the project based on the amount of revenues currently being lost by the golf operation.
3. The golf professional believes that with the installation of the new sprinkler system the club will see new members joining and golf shop revenues increasing. He estimates the club will enjoy the following incremental profits, which level off in year 5.
Incremental Profits
1 $ 150,000
2 $ 175,000
3 $ 200,000
4 $ 225,000
5 $ 250,000
Based on the incremental profits in the table and a discount rate of 9%, calculate the PV, NPV, and IRR of the irrigation project, assuming the sprinkler system has a ten-year useful life with no salvage value at the end of ten years