The demand for tennis is increasing and Johnson, director of tennis, is contemplating whether to add courts to the complex of 20 he already oversees. Even his most conservative forecast cites a need for 4 more courts during next year's peak vacation months (July and August), and less conservative forecasts saw a need for 10-15 courts then. Demand outside the two peak months is also growing, but can be accommodated, for the next six years at least, by the existing court capacity.
Johnson's calculations assume 320 available court hours a month per court, although, for planning purposes, he only counts 260 court hours of play (given rain, excessive heat, etc.). An hour of play brings in an average contribution (revenue less court operating and maintenance costs) of $7.50 per hour. Last season, Johnson's 20 courts brought in $180,000 in contribution to the resort.
A new clay court is expected to cost $32,000 to construct, and to last for 10 years. There is space at his existing tennis complex for 4 more courts. Additional courts could be built elsewhere on the island, but they would require the construction of a new pro shop as well, at a minimum cost of $125,000. To be deemed worthy by the board of directors, investments should generate at least an 11% rate of return on projects.
As general manager, I have been asked to advise whether this decision makes sense. What should the economics in Johnson's capital appropriations request look like? How many courts are justifiable?