2 Net present value Lazy Links Country Club has been more su

2. Net present value. Lazy Links Country Club has been more successful than expected in the 3 years since it opened. The owners believe that this growth will continue for 10 years before leveling off. The pool, racquet, and golf facilities (both indoor and out) can be expanded during each sport\'s off- season. However, the locker rooms, sports shop, and dining facilities are used year-round. These facilities are approaching capacity (4 years sooner than projected), so an expansion is required. If all of the work is done immediately, it will cost $4.5M to build and S0.6M per year to maintain. If capacity is matched to the 5-year forecast, then the capital cost will be $2M now and $5M in 5 years. (These cost estimates include a \"cost of disruptions\") For the staged alternative, maintenance costs are estimated to be $0.2M and $0.6M before and after expansion, respectively. If the owners\' interest rate is 12%, what is the present worth of each option over the next 5 years? Will costs after 5 years make a difference?

Solution

According to the given scenario it will take $4.5M to build it and $0.6M for its maintainence. if the work done imediately the it cost $2M now without taking disruption costs into account. If a 2% of total cost is considered as disruption charges then amount rounds upto $2.2M and adding a 12% of intrest to the amount the total value calculated goes to $2.222M and a $0.2M for maintainenence i.e., $2.4222M

For second case, if the work done later ie., for 5 year forecast the it basic cost is $5M now without taking disruption costs into account. If a 2% of total cost is added every year considered as disruption charges then amount rounds upto $5.5M and adding a 12% of intrest to the amount the total value calculated goes to $6.16M and a $0.6M for maintainenence for i.e., $6.76M

This concludes saying that if the work started imedieately the cost will be less adorable compared to that of 5 year forecast cost.