Florida Atlantic University Capital Budgeting Exercise
Description
Evaluating Capital Expenditure Proposals
City of Cliffsville Tennis Club
Your Task
In this exercise, your task is to work out the costs and benefits of two competing capital expenditure proposals and determine which proposal would lead to better business performance. The term capital expenditure will have a lasting value on producing income for the tennis club.
This exercise will involve using online loan repayment calculators to calculate the required monthly/yearly loan repayments that would be necessary for a certain level of borrowing. There are many such loan repayment calculators available on the Internet.
To use a loan repayment calculator you will need to enter:
The amount to be borrowed (the Principal)
The interest rate
The term of the loan (the number of months in duration)
The payment frequency, for this exercise use monthly
The task of working out which proposal is best has been made easier for you as I have provided an Excel template for you to use. The template will show you one way to set out the problem so that it is easy to read and understand. (TEMPLATE IN ATTACHED LINK)
The Scenario
A tennis center in southern Cliffsville has four grass courts. The Budget and Finance committee is considering two proposals for improving facilities. Both proposals will have some benefit on the long-term revenue of the club.
Proposal A
The four grass courts will be resurfaced as hard courts. This is estimated to increase court usage by 800 court hours per year. The capital cost will be $80,000.
Proposal B
The four grass courts will be covered with an airdome. It will be the only tennis facility with an airdome in Cliffsville. It is estimated that there will be an increase in court usage of 1,000 court hours per year. The capital cost of this project is $100,000.
Please note that for both options the cost of operating the courts will be the same.
Other details
The income raised per court hour while in use is estimated at $25.00 per hour.
The club will need to take a five-year loan from the bank in either case to raise the capital at 9% interest per annum.
Search for a loan repayments calculator on the Internet to assist you with this problem.
Unformatted Attachment Preview
Evaluating Capital Investment Opportunities
Proposal A
Resurfacing of Grass Courts to Hard Courts
Capital Cost $80,000 financed by 5 year loan at 9%
Additional Operating Inc ome
Increase in court usage (hrs / pa)
Total Additional Operating Income
Additional Operating Costs
Loan Repayments Monthly
Total Additional Operating Costs
Hours per Year 5 Year Inome
0 $
$
–
$
Net Income (Loss) per annum
–
$
$
–
$
–
$0.00 $
$
–
$0 $
$
–
$
–
Proposal B
Cover grass courts with Airdome
Capital Cost $100,000 financed by 5 year loan at 9%
Additional Operating Income
Increase in court usage (hrs / pa)
Total Additional Operating Income
Additional Operating Costs
Loan Repayments Monthly
Total Additional Operating Costs
Net Income (Loss) per annum
Note: Loan Repayments were calculated using a standard Loan Repayment Calculator.
There are many available on the Web.
Purchase answer to see full
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