1. **Problem Statement:** Jack Nicklaus is considering two real estate development options on an 800-acre property: (a) develop without a golf course, selling 600 lots after setting aside 25% green space, and (b) develop with a golf course on 200 acres of green space, selling the remaining lots at a higher price. We need to determine if he should proceed with each option based on a 14% required return. 2. **Given Data:** - Total property: 800 acres - Total cost (land + improvements): 30,000,000 - Green space without golf: 25% of 800 = 200 acres - Lots sold: 600 - Sale price without golf: 90,000 per acre - Sale price with golf: 140,000 per acre - Golf course cost: 6,000,000 - Sales rate: 75 lots/year - Tax rate: 40% - Required return: 14% 3. **Step 1: Calculate revenue and costs for option (a) no golf course.** - Sellable acres = 800 - 200 = 600 acres - Revenue = 600 acres * 90,000 = 54,000,000 - Cost = 30,000,000 4. **Step 2: Calculate revenue and costs for option (b) with golf course.** - Green space with golf = 200 acres (used for golf) - Sellable acres = 800 - 200 = 600 acres - Revenue = 600 acres * 140,000 = 84,000,000 - Cost = 30,000,000 + 6,000,000 = 36,000,000 5. **Step 3: Calculate annual cash flows and tax effects.** - Sales per year = 75 lots - Years to sell = 600 / 75 = 8 years - Cost per lot (write-off) no golf = 30,000,000 / 600 = 50,000 - Cost per lot with golf = 36,000,000 / 600 = 60,000 6. **Step 4: Calculate annual revenue, cost, taxable income, tax, and after-tax cash flow per year for each option.** **No golf:** - Revenue per year = 75 * 90,000 = 6,750,000 - Cost write-off per year = 75 * 50,000 = 3,750,000 - Taxable income = 6,750,000 - 3,750,000 = 3,000,000 - Tax = 40% * 3,000,000 = 1,200,000 - After-tax cash flow = Revenue - Tax = 6,750,000 - 1,200,000 = 5,550,000 **With golf:** - Revenue per year = 75 * 140,000 = 10,500,000 - Cost write-off per year = 75 * 60,000 = 4,500,000 - Taxable income = 10,500,000 - 4,500,000 = 6,000,000 - Tax = 40% * 6,000,000 = 2,400,000 - After-tax cash flow = 10,500,000 - 2,400,000 = 8,100,000 7. **Step 5: Calculate Net Present Value (NPV) for each option using required return 14%.** - NPV formula for annuity: $$NPV = \sum_{t=1}^8 \frac{CF}{(1+0.14)^t}$$ - Use annuity factor for 8 years at 14%: $$AF = \frac{1 - (1+0.14)^{-8}}{0.14} \approx 4.638$$ **No golf NPV:** $$NPV = 5,550,000 \times 4.638 - 30,000,000 = 25,740,900 - 30,000,000 = -4,259,100$$ **With golf NPV:** $$NPV = 8,100,000 \times 4.638 - 36,000,000 = 37,567,800 - 36,000,000 = 1,567,800$$ 8. **Step 6: Conclusion** - No golf project has a negative NPV (-4,259,100), so Jack should not proceed. - Golf course project has a positive NPV (1,567,800), so Jack should proceed with the golf course. **Final answers:** - a. No, do not proceed without golf course. - b. Yes, proceed with golf course.