Question

Badger Creek is a golf course located northwest of Toronto. It is currently in operation but is for sale. Samantha is looking at buying it for $14,000,000. If she buys the golf course she will have to spend another $7,000,000 to renovate it. After renovations, there will be a full 18 hole course as well as an executive 9 hole course. Samantha will also need another $1,000,000 as operating funds to smooth over any cash shortfalls while she rebuilds the business. Samantha has $12,000,000 and will have to borrow the rest. Samantha feels that she can sell 100 memberships for $5,000 per year. Memberships provide preferred tee-off times. An 18 hole round of golf costs each player $40. A 9 hole round costs each player $25. Players typically play as a foursome meaning four players at once. Each course can accommodate 10 foursomes an hour and has tee-off times scheduled for 10 hours a day. Weather studies show an average of 120 days a year which are suitable for golf. On the cost side, Samantha figures it will cost her $2,000,000 a year to operate the course. Plus there is interest on the loan at 6%. At the end of fifteen years she expects she can sell the golf course to a housing developer for $25,000,000 at which point she will pay back the loan. please explain

Answer 1

Explanation :

Startup Expenses

Cost of acquiring the golf course	$14,000,000
Renovation cost	$7,000,000
Additional capital fund	$1,000,000
Total Expenses(At the time of acquisition)	$22,000,000

Calculation of loan amount

Total amount required	$22,000,000
Less: Amount available with Samantha	$12,000,000
Loan amount	$10,000,000

Annual operational earnings

Revenue from membership	$500,000
Revenue from general operations	$3,120,000
Less : Operational Cost	$2,000,000
Operating Income	$1,620,000

The method used for calculation of revenue from general operations :

Total number of working days: 120

Total number of hours a day: 10

Total hours : 1,200

Number of foursomes (4 players) in an hour in each course: 10
Note: Remember we have two courses.

Cost of 18 hole round per player : $40

Cost of 9 hole round per player: $ 25

Total cost across both the courses in an hour :$(65 x 4 x 10) = $2,600

For calculation of operational revenue, multiplying the total cost generated in an hour to total operational hours : (1200 x 2600) = 3,120,000

Final summary after 15 years :

Cash on the sale of the golf course	$25,000,000
Total Earnings	$40,500,000
Less : Bank Loan	$10,000,000
Less: Total interest on loan (at 6% p.a.)	$9,000,000
Total Profit	$46,500,000

NOTE : The occupancy rate of the course for the calculation of operational revenue is taken to be 100%. However usually that's not the case. It is around 80% - 90% on an average.