Question

Jacob Swimming School

Business Background

Jacob Swimming School provides swimming courses around Surfers Paradise in Queensland, Australia. The business began in 2000 with the intention of bringing swimming into the lives of as many people as possible. Both Jacob Teelan and Kiren Goodman had swum around the ocean beaches of Surfers Paradise since they were small children. After finishing school both became professional swimming instructors. After working for a number of years for another company, they decided to take a risk and open up their own business.

The swimming Course

The swimming course offered by Jacob Swimming School is a 3-day intensive program that allows beginner to develop their swimming skills. The swim course is divided into three segments.

Academic training – Giving students the basic principles and knowledge needed for safe and enjoyable swimming in the sea.

Pool training – Which will teach students the basic skills of swimming.

Open Water training – Allows students to demonstrate their mastery of these skills and practice them in an open water environment.

Jacob is considering to build up a swimming pool near the beach to create a tourist attraction like the swimming pool in Bondi Beach in Sydney. He believes the project could be quite profitable. The local council is also interested in this project. They believe it could boost number of tourist, hence energies small businesses and land value. The local council advised Jacob he will receive the approval for this project. However, an environment group is strongly against this idea and claim this project would ruin the eco-system. Flyers explaining the negative impact to environment from this project have been delivery to every premise. If sufficient local residents signed up against the project, the local council would have to change their mind. So, the future is not very clear.

The operation information is displayed below:

According to the agreement, Jacob would have full control of this project and would receive all the profit generated within the first 5 years. However, after 5 years of operation, he has to transfer the full ownership of the swimming pool to the local council. In return, the local council will pay Jacob a bonus valued at $100,000 for his entrepreneurship.

The initial investment to build up the pool is $1,000,000. Which will be fully depreciated after 5 years.

Estimated customer for the first 2 years are 210,000 per year. As the new pool become famous, estimated customer for year 3, 4 and 5 would be increased to 350,000.

Jacob plans to charge each visit $3 for the first 2 years and $4 for the last 3 years

Each visitor is provided with a complementary towel which cost $0.5 in year 1 and year 2. The cost will increase to $1 per towel for the last 3 years

Total operational cost is $250,000 per year for all five years

Major maintenance will be conducted in year 2 and year 4. The cost for each maintenance is $15,000

Tax rate is 30%

Discount rate (10%) table

Year	Discount Rate
Year 1	0.9091
Year 2	0.8264
Year 3	0.7513
Year 4	0.683
Year 5	0.6209

Required:

a) Advise Jacob whether he should take this project based on your NPV calculation.

                                                                                                                                   

b) What are the limitations for only using NPV analysis to evaluation a strategic project?

                                                                                                                                   

c) Do you believe Jacob should invest on this project? Justify your answer by considering qualitative factors.

                                                                                                                                   

Answer 1

1
	Year	0	1	2	3	4	5	Total NPV
	Cash Flow
	Initial Investment	-1000000
	Revenue		630000	630000	1400000	1400000	1400000
	Bonus						100000
	Towel Cost		-105000	-105000	-350000	-350000	-350000
	Operational Cost		-250000	-250000	-250000	-250000	-250000
	Maintenance			-15000		-15000
	Net Inflow	-1000000	275000	260000	800000	785000	900000
	Discount @ 10%	1	0.9091	0.8264	0.7513	0.683	0.6209
	Net Present Value	-1000000	250002.5	214864	601040	536155	558810	1160872
2	Limitations:
	Sensitivity to discount rates
	Excludes value of real options that may exist within the investment
	Does not take into account factors other than cash flow and discount like: economic factor etc
3	Jacob should accept the project considering positive Cash Flow (PV) of 1160872. However since future is not very clear, he should wait till all the residents come up with any decision