Problem:
Robotics is a corporation seeking to own and operate 'state of the art' golf courses in Hilton Head SC. Although management has no "hands on" experience in this industry, it has been successful in implementing computer technology in the manufacturing sector. The current project being evaluated involves the use of computerized robots for the purpose of enhancing the pleasure of a round of golf, and making it truly an unforgettable experience. The robots would stay beneath the surface of the ground at each green and emerge when a group arrives. The robots would do the following:
Fix ballmarks
Lift, clean , and replace golfballs
Line up the putt and tell the golfer whether it is up or downhill, against the grain or with the grain etc.
For the lady golfers, the voiceover would be George Clooney
For the men, it would be the voice of Elizabeth Hurley
Based on the following information related to this investment, you are to advise management whether or not it should proceed with the project. You are to support your recommendation with a model that shows what the NPV of the investment is estimated to be. Also include any other factors which you think might be relevant to this investment decision.
The robots would cost $6,250,000.
For depreciation purposes the robots would be amortized over 5 years using the uniform straight-line methodology.
The club would dispose of the robots at the end of the fifth year for an estimated salvage value of $1,300,000
Annual cash flows estimated to be associated with the robot investment are:
Revenue $3,500,000
Variable Costs $ 300,000
Fixed Costs $ 400,000
The minimum return required (cost of capital) is 14%
The income tax rate is 40%