Castro, Princess Kate S.

Mesa, Ysrael M.
Tobias, Auneill Kurt Y.

Tarlac State University

Riverside Leisure Centre

A MAS Case Study

Introduction
Riverside Leisure Centre is an establishment for relaxation, entertainment, and
pampering. To serve their members, they have a leisure pool, sports hall, four squash
courts and changing rooms alongside with a small fitness room. The centre has been
functioning for a long period now but just like all companies, the company faces a problem
today – they are losing their members.

A spacious fitness room is a primary preference of the prospective members of a leisure

centre in choosing where to register. However, Riverside Leisure Centre’s fitness room is
too small to accommodate its members. For this reason, its clientele has been on the rocks
as the other companies’ clienteles continuously increase due to their spacious fitness
room.

This led the company to be open for alternatives with the given two proposals which are:
a) To incorporate Squash Court No. 4 with the fitness room.
b) To incorporate both Squash Courts No. 3 and 4 with the fitness room.
These were proposed due to the low bookings these two squash courts have.

June West, the new manager, suggested the alternative which is basing the additional
annual revenue on the current income per current sq. ft. of the small fitness room
multiplied by the additional sq. ft. after the incorporation.
Thus, the equation:
𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑡 𝑖𝑛𝑐𝑜𝑚𝑒
Additional Annual Revenue= x marginal sq. ft.
𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑠𝑞.𝑓𝑡

where:
current income = 180, 000
current sq. ft. = 2, 200 sq. ft.
marginal sq. ft. = additional sq. ft. after incorporating a squash court
Laura, the management accountant, suggested the probability distribution based on
judgement of all senior managers to estimate the total revenue for the fitness room.
Thus, the equation:
Optimistic Income x Probability rate
Most Likely Income x Probability rate
+ Pessimistic Income x Probability rate

Total Revenue for the Fitness Room

Optimistic Income is based on the judgment that the fitness room will be very successful,
a lot new members will be attracted, and the existing members will use the room even
more.

Most Likely Income is based on the judgment that the fitness room will be very successful
initially but the membership will slowly fall.

Pessimistic Income is based on the judgment that the fitness room will be an initial
success but too few new members will be attracted.

Statement of the Problem

Since the company has two alternatives which are mutually exclusive, and two proposals
with regard to forecasting of income, the management faces the following problems:
1. Should the company put into action any of the alternatives?
2. Which among the alternatives are to be accepted or rejected?
3. Which income forecasting approach is better?
4. Which proposal based from the alternatives is to be implemented?

Proposed Solutions
1. The management shall put into action any of the alternatives because it is clear that
the leisure centre is losing members due to small space. The space is of the essence
because the members can freely move and feel the vibe of doing fitness exercises.
According to Turkish Journal of Sport and Exercise, the atmosphere of health life
and sport centres is much more paid attention because it motivates the people
going to the centres. It is of a must that the incorporation of squash courts be put
into action.

2. In choosing among the alternatives to be accepted or rejected, the management

shall use the Net Present Value Method. NPV is the difference between the present
value of cash inflows and the present value of cash outflows over a period of time.
 The projects with positive NPV shall be accepted indicating that earnings exceeded
the costs.

The NPV of alternatives 1 and 2 of June’s and Laura’s Proposals follow:

June West Proposal

Alternative Net Present Value Decision

1 608,135 Accept
2 695,400.23 Accept

Computations:

Net Present Value = Present Value of Cash Inflows minus Present Value of Cash
Outflows
Present Value of Cash Inflows = Revenue minus Annual Cost, and Present Value of
Salvage Value
Present Value of Cash Outflows = Capital Outlay

Revenue

Income per sq. ft. = Income divided by sq. ft.

= 180,000/2,200
= 81.82

Alternative 1 Alternative 2
2,700 sq. ft. * 81.818181 = 220,909 3,200 sq. ft. * 81.818181 = 261,818

Annual Costs
Alternative 1 Alternative 2
Permanent Staff 19,000 19,000
Casual Staff 8,000 12,000
Utilities 1,400 1,800
Maintenance Contracts 8,200 12,200
Cleaning and other 2,100 2,100
Advertising 15,000 15,000
Total: 53,700 62,100

Cash Inflows

Alternative 1 Alternative 2
Revenue 220,909 261,818
Costs 53,700 62,100
167,209 199,718
 Present Value of Cash Inflows
Cost of Capital = 7%
Years= 5 years
Present Value of Ordinary Annuity= 4.10

Alternative 1 Alternative 2
167,209 * 4.10 = 685,590 199,718 * 4.10 = 818,883

Present Value of Residual Value

Cost of Capital = 7%
Years= 5 years
Present Value of 1 = 0.71

Alternative 1 Alternative 2
6000 * 0.71 = 4,278 9,000 * 0.71 = 6,417

Present Value of Cash Outflows

Capital Costs
Alternative 1 Alternative 2
Building Works
Doors 1,100 1,100
Remove Existing Walls 2,200 3,600
New Ceilings 1,900 3,200
Fire Exit 3,300 3,600
Decoration 7,100 10,600
Total: 15,600 22,100

Services
Electrical 4,000 5,700
Lighting 2,000 3,200
Airconditioning 14,000 12,000
Total: 20,000 20,900
Equipment
Cardio-vascular machines (bikes, rowers) 38,000 78,000
Cardio Theatre 7,000 7,800
Drinking fountain 1,100 1,100
Total: 46,100 86,900

Grand Total: 81,700 129,900

Net Present Value

Alternative 1 Alternative 2
Present Value of Cash Inflows 685,590 818,883
Present Value of Salvage Value 4,278 6,417
Present Value of Cash Outflows 81,700 129,900
Net Present Value 608,168 695,400
 Laura Proposal

Alternative Net Present Value Decision

1 592,390.73 Accept
2 573,140.54 Accept

Computations:
Net Present Value = Present Value of Cash Inflows minus Present Value of Cash
Outflows
Present Value of Cash Inflows = Revenue minus Annual Cost, and Present Value of
Salvage Value
Present Value of Cash Outflows = Capital Outlay, and Refurbishment Cost

Revenue
Total Annual
Revenue for the
Fitness Room Probability Alternative 1
Pessimistic 210,000 20% 42000
Most Likely 225,000 50% 112500
Optimistic 250,000 30% 75000
Sub-total 100% 229500
Less: Oportunity Cost 10,000
Total 219,500

Total Annual
Revenue for the
Fitness Room Probability Alternative 2
Pessimistic 240,000 50% 120000
Most Likely 250,000 40% 100000
Optimistic 270,000 10% 27000
Sub-total 247000
Less: Oportunity Cost 15,000
Total 232,000

Annual Costs
Alternative 1 Alternative 2
Permanent Staff 19,000 19,000
Casual Staff 8,000 12,000
Utilities 1,400 1,800
Maintenance Contracts 8,200 12,200
Cleaning and other 2,100 2,100
Advertising 15,000 15,000
Total: 53,700 62,100
 Cash Inflows

Alternative 1 Alternative 2
Revenue 219,500 232,000
Costs 53,700 62,100
165,800 169,900

Present Value of Cash Inflows

Cost of Capital = 7%
Years= 5 years
Present Value of Ordinary Annuity= 4.10

Alternative 1 Alternative 2
165,800* 4.10 = 679,812 169,900 * 4.10 = 696,624

Present Value of Residual Value

Cost of Capital = 7%
Years= 5 years
Present Value of 1 = 0.71

Alternative 1 Alternative 2
6000 * 0.71 = 4,278 9,000 * 0.71 = 6,417

Present Value of Cash Outflows

Capital Costs
Alternative 1 Alternative 2
Building Works
Doors 1,100 1,100
Remove Existing Walls 2,200 3,600
New Ceilings 1,900 3,200
Fire Exit 3,300 3,600
Decoration 7,100 10,600
Total: 15,600 22,100

Services
Electrical 4,000 5,700
Lighting 2,000 3,200
Airconditioning 14,000 12,000
Total: 20,000 20,900
Equipment
Cardio-vascular machines (bikes, rowers) 38,000 78,000
Cardio Theatre 7,000 7,800
Drinking fountain 1,100 1,100
Total: 46,100 86,900
Refurbishment Cost 10,000
Grand Total: 91,700 129,900
 Net Present Value

Alternative 1 Alternative 2
Present Value of Cash Inflows 679,812 696,624
Present Value of Salvage Value 4,278 6,417
Present Value of Cash Outflows 91,700 129,900
Net Present Value 592,390 573,141

With the NPVs’ shown above, it is clear that the proposals made by June and Laura
are acceptable.

3. June uses per sq. ft. as the base for the revenue while Laura utilized the probability
approach. The latter approach is better than the former because of the following
reasons:

 June’s revenue approach is weak because of non-consideration of

qualitative areas, for example, future demands of the members where
Laura’s approach did.
 June’s revenue approach did not consider opportunity costs and additional
refurbishment costs.
 June’s revenue approach did not put into consideration relative frequency,
the occurrence of possible outcomes in singular event.

4. The alternative that shall be followed shall be based on the criteria from number 2
and 3.
Recommendation
It is evidently seen that June’s NPV is greater than Laura’s NPV this is because the
approach used by June has provided a higher base on revenue. In practice, the
project with higher NPV is pursued. In this specific situation, June’s proposals
have higher NPV. However, after thorough analysis, it is advisable to pursue one
of the proposals made by Laura because of the revenue approach used by Laura is
stronger than June’s approach because the former has considered the occurrence
of qualitative and quantitative factors.

In choosing which alternatives from Laura’s proposals shall be pursued, the rule
for NPV shall be followed. The higher the NPV, the higher the projected profit can
be generated. Alternative 1 is then pursued.

Hence, after our thorough study, we strongly recommend to pursue Laura’s

Alternative 1 proposal.