Rock Creek Golf Club

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Case 27-2: Rock Creek Golf Club

Submitted by: Adam Kessler

Submitted to: Dr. Alan Czyzewski
Submitted for: MBA 613

Submitted on: Wednesday, 4/11/12

Question 1
An amortization table has been completed regarding the potential loan that RCGC would need to obtain in order to fund the purchase of 40 gasoline-powered golf carts. RCGC would need to obtain a loan for $89,600 at an eight percent interest rate for five years with a payment due at the end of each year in order to fund the purchase. A payment in the amount of $22,441 will be due at the end of each year for five years (the duration of the loan). Total interest paid will be $22,604 over the course of the loan. When you factor in the eight percent annual interest over the course of five years, the 40 golf carts will cost a total of $112,204 to purchase outright ($89,600 in principal and $22,604 in interest). The table listed below accurately shows how much principal and interest will be paid in each year along with the remaining balance following each payment. Table 1| | | |

Year| Payment| Principal Paid| Interest Paid| Remaining Balance| 1| 22,441| 15,273| 7,168| 74,327|
2| 22,441| 16,495| 5,946| 57,832|
3| 22,441| 17,814| 4,627| 40,018|
4| 22,441| 19,239| 3,201| 20,779|
5| 22,441| 20,779| 1,662| 0|
Sum| 112,204| 89,600| 22,604|  |

Question 2
The implicit rate for the lease is 3.78%. This has been determined using the “IRR” function within excel, with the cash flows of $89,600 in year zero (since RCGC will be receiving 40 golf carts valued at $2,240 each) and -$20,000 in years one through five (payment of $500 for each of the 40 golf carts each year for five years). Table 2-1 listed below uses data based on a 40 golf cart purchase. With total net cash flows equal to -$10,400. This means that RCGC is paying $10,400 above the selling price in order to lease over a five-year period.

There are several reasons why the implicit rate of the lease is less than the eight percent RCGC would have to pay in order to borrow the funds. The most obvious reason is because these are two separate methods. The eight percent method is based on borrowing a lump sum of $89,600 while the implicit rate of 3.78 is obtained through a lease as opposed to borrowing a lump sum.

Another reason for the difference in rates has to do with the salvage value allocation. In the option in which RCGC gets a loan of $89,600 with an 8% interest rate, they (RCGC) get to keep the carts and therefore get to keep the salvage value of $240 per cart. In the lease option the leaser (salesman B) retrieves the golf carts at the end of the five years and has the rights to the $240 salvage value placed on each of the 40 carts. With the loan option you get a higher interest rate but have the rights to the salvage value, while the lease option offers a lower implicit rate, but RCGC has no rights to the salvage value. Table 2-1| | |

Year| Receipt| Payment| Net Receipt Payment|
0| 89600| 0| 89600|
1| 0| 20000| -20000|
2| 0| 20000| -20000|
3| 0| 20000| -20000|
4| 0| 20000| -20000|
5| 0| 20000| -20000|
Total| 89600| 100000| -10400|
| | | |
| | IRR| 3.78%|

Table 2-2| | | |
Year| Receipt| Payment| Net Receipt Payment|
0| 89600| 0| 89600|
1| 0| 22441| -22441|
2| 0| 22441| -22441|
3| 0| 22441| -22441|
4| 0| 22441| -22441|
5| 0| 22441| -22441|
Total| 89600| 112205| -22605|
| | | |
| | IRR| 8%|

Question 3
Purchasing the golf carts is the best option as it has a higher net present value than leasing does. The purchasing offer that is presented by salesman A has a net present value of $129,872 as opposed to the leasing option presented by salesman B that has a net present value of $124,390. Table 3-1 shows the amounts that the carts would depreciate each year if RCGC were to purchase the carts. These...
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