In this project we will apply what we learned about capital budgeting using real-world examples. General Instructions:

• This is an individual project, i.e., each one of you will have to submit the project. You may discuss and work together with your classmates, but the write-up has to be on an individual basis. This means you have to write it in your own words. I will dock points (20% of the grade) for identically written papers from all parties involved.

• Deadlines:
  o First draft: December 2

  o Final draft: December 17

• More instructions for the write-up and the grading rubric are posted separately. See

  “Instructions for the write-up.”

  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 back to the gym to workout once Monterey County lets gyms reopen. He wants you to help him evaluate two options:

  Option A: Go back to the gym. He is currently paying $130 per month for a gym membership. He assumes that this price will likely remain the same for the next 8 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 equipment that he uses is wiped down and sanitized.

  Option B: Purchase Tonal. A home gym that costs $2,995. He also has to purchase equipment worth $495 and pay for installation (assume this is $350) 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 membership fee. He assumes this monthly membership fee will likely remain the same for the next 8 years.

  Dustin plans to stay on his workout regimen for the next six to eight years. His opportunity cost, i.e., discount rate is between 2.25% - 4.5%.

  Your job is to make a recommendation about which option will be more cost effective.

Questions for the project:

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. (2-10 sentences per criterion)

   a. NPV
   b. IRR
   c. MIRR
   d. EAC. Note: in the textbook, we calculated the Equivalent Annual Cost. For this problem, you should think of this as an Equivalent Monthly Cost. 

2. e. Payback period

3. 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)

   a. If Dustin keeps working out for the next six years and the discount rate is 2.25%.

4. b. If Dustin keeps working out for the next six years and the discount rate is 4.5%.

5. c. If Dustin keeps working out for the next eight years and the discount rate is 2.25%.
   d. If Dustin keeps working out for the next eight years and the discount rate is 4.5%.

6. Based on your results from step 2, make a recommendation for Dustin if a. he keeps working out for the next six years (2-10 sentences)
   b. he keeps working out for the next eight years (2-10 sentences)