The WellFit group of gymnasiums has experienced a steady decline in the number of members. The management is considering investing in updated equipment and facilities in all the gymnasiums and offering more services in an attempt to attract new members. The management appraises investments of this type over a time period of five years, using a discount rate of 17 per cent. The initial cost of the additional equipment and refurbishments will be £100,000. At the end of year 2 a major safety check on all the equipment will cost £15,000. Additional running costs (excluding depreciation) will amount to £13,000 each year and additional revenues as a result of the changes are forecast to be as follows.

Calculate the following for the proposed investment and comment on whether it is worthwhile from a financial point of view.

(a) The payback period Accounting in a Nutshell 339

(b) The net present value of the cash flows generated by the investment. The discount factors for years 1 to 4 are provided in question 1. The factor for year 5 is 0.46.

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Year 1 2345 65,000 52,000 40,000 40,000 38,000