ROYAL PALM GOLF AND COUNTRY CLUB

In early January 2010, Royal Palm Golf and Country Club (RP), a private golf
course located in Lahore, was preparing for the annual general meeting with
the board of directors and the club’s membership. Zakir Hussain, general
manager of Royal Palm, and Javed Khan, superintendent, felt the most
pressing issue was an upgrade and change to the method of irrigation being
used by the course. Newly passed government regulations had created a
need for a major change in the irrigation system, a change that would cost
the club close to 1,425,000. The annual general meeting was being held on
February 28, 2010, so the proposal had to be completed quickly.

GOLF INDUSTRY IN PAKISTAN

Golf is a game, but over the past several years it has become an important
part of doing business in the corporate world. After all, other than the office
and other places, a golf course offers a venue where a person can have
client’s, employees or employers undivided attention for the better part of
four hours. The golf industry in Pakistan was large and growing in 2010. The
total revenue derived from the golf industry was projected to be 1.3 billion.
The spending was spread out over a variety of areas, the largest of which
was green fees at 780 million or 60 per cent of all expenditures. Golf
equipment, golf apparel and golf travel were the next three largest
expenditures, each accounting for 13 percent, 18 percent, and 9 percent
consecutively of the total industry. The golf participation rate in Pakistan was
approximately 525,000 people.

In Lahore, the golf industry was the largest in Pakistan with the total number
of golfers in 2010 reaching approximately 410,000. There are a total of 20
golf courses in Pakistan, 7 are run by Pakistan army and the remaining 13
are run by a mixture of public and private ownership. Lahore has 3 golf
clubs, which are; Lahore Garrison Golf & Country Club, Royal Palm Golf & Country
Club, and Lahore Gymkhana.

The golf industry had shown major changes during the last 20 years. In
Pakistan, there had been a dramatic shift in the type of golf courses that
were being opened. Until the start of 1980's there were only 2 golf courses
in Lahore.

The annual success of the golf industry was heavily affected by the weather.
The seasons in Pakistan were highly cyclical, so the majority of money was
made during the peak months of November-March. For example, raining
conditions during the summer in many parts of Pakistan contributed to
reductions in the number of rounds played. The poor weather conditions led
to a reduction in rounds played by as much as 20 percent at some courses.
ROYAL PALM GOLF AND COUNTRY CLUB

The Royal Palm Golf & Country Club (Royal Palm) is located on the site of the
former Pakistan Railways Golf Club which was founded in 1927. Today
completely remodeled and landscaped, the Royal Palm bears little
resemblance to its past. Widely regarded as one of the subcontinent’s best
golf courses, the Club itself has set a new benchmark for others in the region
to attempt to emulate both in concept and execution. The Pakistan Railways
leased this property in September 2001 to the consortium now named
Mainland Husnain Pakistan Limited (MHPL). Spread over 140 acres of land
and just a few minutes away from Shahrah-e-Quaid-e-Azam, this expanse of
rolling greens and stately old trees offers a serene backdrop for the pursuit
of playing, pleasure, business and social interaction. Every aspect of this
prestigious club has been designed by experts in the field, making it the
most exciting country club in Pakistan.

The Royal Palm Golf & Country Club is a modern oasis of leisure lifestyles
located in the heart of the city is fast emerging as an integral part of the
landscape of urban Lahore. Established since 2002, Royal Palm Golf &
Country Club is regarded as the premier golf course and leisure complex in
the sub-continent. The club is iconic of the development of the city,
reverberating of a sense that Pakistan’s commitment to set and exceed
global benchmarks has become a destined reality. The club has an 18-hole
private golf course that enjoyed a full membership and a strong financial
base. Approximately 200 people were on the waiting list for membership.
In 2010, Royal Palm was listed as the best Golf Courses in Pakistan. The
state-of-art 72 par, 18 hole championship golf course was designed by the
LDR consultants of Malaysia. The lower case front 9 holes of the golf course
and the multi-tier 32 by, night-lighted driving range were opened in February
2003 and the back 9 in October 2003.

The Club’s 18 hole par 72 golf course with rolling fairways and immaculate
landscapes, eight lakes serving as water hazards, stately old trees and
contoured terrain offers a challenging game to enthusiasts. Specially
designed underground drainage ensures that play can be resumed soon after
rain.

The club now has a membership of approximately 2000 family members

comprising of the nation’s leading businessmen, decision makers of
prominent business houses and representatives from multinational
corporations from different industries and trade, along with young
trendsetters of the country, and expatriates managing some of top global
brands currently operating in Pakistan. The families of all members similarly
enjoy the rich host of services blended with top quality facilities resounding
in the actualization of the good life.
CURRENT ISSUE

Royal Palm had always been able to irrigate the course by pumping water
directly from the BRB Canal at no cost. In seasons of no water in the canal,
the club would use the pumps to extract water from under the ground. In
May, 2010, the Ministry of Irrigation (MOI) and Parks & Horticultural Authority
enacted the Lahore Water Resources Act (LWRA), and within this Act, a strict
regulation was put in place to govern the taking of water from the canal.

The LWRA was enforced to ensure that it protected Lahore’s valuable water
resources. It covered the use of water, delivery of drinking water to the end
consumer and potential pollution of groundwater. As environmental issues
became more of a political issue, the LWRA continually increased their
standards and tightened their restrictions. Stiff fines were enacted on
consumers and corporations that were in violation of the LWRA.

Based on the amount of water required to irrigate its golf course, Royal Palm
required a permit to take water from the canal. In the past, the MOI had
permitted Royal Palm to pump up to 1,000 gallons per minute, but in 2010,
that amount was reduced to only 435 gallons per minute. The MOI did,
however, allow a transitional permit at 1,000 gallons per minute for Royal
Palm until July2010, which would allow the course time to make the
necessary changes.

The course’s superintendent, Javed Khan, concluded that there were two
alternatives. He could make some course alterations and build a new pump
house, or he could use WASA water as a long-term solution for irrigation of
the golf course.

The scope of work involved in building a new pump house included

expansion of the pond; adjustments to the irrigation system in the area of
the pond expansion; new water lines to service the pond for supply and
demand; a new wet well and a pump house next to the 10th tee; a new,
larger pipe from the pump house to the top bench of golf course; and
restoration of all the affected areas.

Over the summer months, a golf course in Lahore could use between 11
million to 26 million gallons of water, depending on the rainfall and climate of
the summer months. During the average summer, the course would need
approximately 22 million gallons. With the changes made to the pond, the
course and the pump house, Javed knew that he could use the pond as a
mechanism to store the excess water pumped from the canal during low
usage periods, which could then be used in high water usage periods.

COSTS OF THE PUMPHOUSE

In order to make the required changes, Zakir and Javed knew they would
need to the get the resolution passed by a two-thirds majority of the
membership. Zakir planned to ask the club’s membership to approve a
capital expenditure of 1,425,000 for the project. The money would be split
among the different aspects of the expansion.

The new pumping equipment was expected to cost around 500,000 for four
new vertical turbine pumps and the pumping station. The new pumps were
hydro-friendly, but Zakir expected that with the increased workload, the
club’s electricity costs would increase by close to 120,000 per month during
the operating season, which ran from October to March. Zakir also estimated
that the new pumps would last close to 10 years with a salvage value of only
100,000.

The new pump house structure would cost approximately 200,000. In

addition to the fixed costs of equipment and buildings, a significant amount
of money was going to be spent on the engineering of the new site and fees.
Zakir estimated these costs at an additional 380,000.

The remaining 345,000 would be spent on the Landscaping and restoration

of the affected areas. Overall, Zakir knew the project would be expensive
but felt that it was probably cheaper then moving to WASA water.

Alternative 2: Using WASA Water

If Royal Palm did not build the new pump house, its water supply would have
to be supplemented with water purchased from the WASA. In order to tap
into the WASA water system, the up-front costs to Royal Palm would be
about 350,000 to put in the appropriate plumbing. In addition to the
necessary plumbing costs, the course would have to pay for the actual water
itself. With a permit for 435 gallons per minute, Zakir felt that WASA water
would have to be used to provide half the water required by the course. He
estimated the cost per gallon at 0.07 per gallon; however, he also knew that
both the cost of water from the WASA and the water requirements for the
course could change dramatically at any time.

Although Royal Palm was a private club, Zakir had worked for Gymkhana
club in the past, so that he knew the pumps and the pumping station would
classify for a capital cost allowance of 33.33 per cent per year. The typical
course would pay an average of 22 per cent income tax.

FINAL DECISION

Although Zakir and Javed felt convinced that the new pump house was the
best course of action for the club, they knew that they would have to
convince their membership to sign onto the idea. They felt that if they could
show a 20 per cent return, the membership would quickly pass the motion.
Zakir and Javed knew they needed to get started on construction soon to be
ready for the upcoming season, so they settled in to prepare a thorough and
convincing business plan to present at the upcoming annual general
meeting.

Required:

1. Determine the future incremental cash flows of the two

alternatives Zakir and Javed are considering. Evaluate the two options
using appropriate capital budgeting tools (payback, NPV, and IRR,
assume a desired return of 20 percent)
2. What recommendations should Zakir and Javed make to the
membership of Royal Palm Golf and Country Club? Provide necessary
support and justification?