BUS307: Writing Assignment

In this project, we will apply what we learned about capital budgeting using real-world examples. Your job is to make a recommendation about which option will be more cost-effective.

Part 1 - The Problem Background:

Suppose you are a health fitness consultant. Your clients come to you for advice ranging from diet and nutrition to exercise. One of your clients is Dustin Winthrop. He is relatively healthy but has an underlying health condition that puts him in the vulnerable category for COVID-19. He is worried about going to the gym to work out. He wants you to help him evaluate two options: Option A: Go back to the gym. He is currently paying $150 per month (taxes included) for a gym membership. He assumes that this price will likely remain the same for the next 10 years. If he goes back to the gym, he will make sure to observe social distancing, wear gloves and a face mask, and make sure each piece of equipment that he uses is wiped down and sanitized. Option B: Purchase Tonal. A home gym costs $3,495. He also has to purchase equipment worth $495 and pay for installation (assume this is $500) and taxes (assume the sales tax is 9.5% and will be applied to the total cost). He also has to pay a $49 per month (taxes included) membership fee. He assumes this monthly membership fee will likely remain the same for the next 10 years. Dustin plans to stay on his workout regimen for the next six to ten years. His opportunity cost, i.e., discount rate is between 5.5% - 7.75%. Your job is to make a recommendation about which of the 2 options would be more cost effective.

Part 2 - Questions that must be addressed in the write-up:

Note: your score for the write-up will be closely related to your grade in the calculations - -- i.e., the best writing style won't be able to hide a poorly constructed financial analysis. Please make sure to think about the finance part first, and then think about how you are going to write it using the questions in Part 1 as a guide.

1. For each capital budgeting decision criterion below, write a justification for that criterion's suitability for this analysis. That is, use this step to figure out which of the following capital budgeting decision criteria you will use to make the recommendation.

NPV (5 sentences for criterion) IRR (5 sentences for criterion) MIRR (5 sentences for criterion) AAR (5 sentences for criterion) Payback period (5 sentences for criterion)

2. For each method that you deem appropriate, calculate the outcome for each of the following scenarios: (attach a separate sheet showing your solutions for each scenario/ option)

If Dustin keeps working out for the next five years and the discount rate is 5.5%. If Dustin keeps working out for the next five years and the discount rate is 7.75%. If Dustin keeps working out for the next ten years and the discount rate is 5.5%. If Dustin keeps working out for the next ten years and the discount rate is 7.75%.

3. Based on your results from step 2, make a recommendation for Dustin if

he keeps working out for the next five years (5 sentences) he keeps working out for the next ten years (5 sentences)