Exercise 10 - Evaluating Capital Expenditure Proposals
Cygnet Tennis Club
A tennis centre in southern Tasmania has four grass courts. The management committeee 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 Tasmania. It is estimated that there will be an increase in court usage of 1,000 court hours per year. The airdome will increase the tennis centres operating costs by $15,000 per year. The capital cost of this project is $120,000.
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.
Your task
Your task is to evaluate the above two capital expenditure proposals by computing the net benefit of each project to the club over the next five years.
A Excel template is available for your assistance
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