Jinny Buffett recently retired as a flight attendant and is interested in opening a fitness center and health spa exclusively for women in Grand Cayman, where she resides. After careful study, she is somewhat puzzled as to how to proceed. In her words, "I see my business going in one of two directions: Either I open the fitness center and health spa all at once, or I start with the health spa and hold off on the fitness center for a while. Either way, it should be a success because women on this island love to be pampered. My only concern about the fitness center is the initial cost, but if the projections look good enough, I know some investors in Phoenix who can help me get started. In any event, I plan to retire permanently in 10 years." Table 6-4 and Table 6-5 Note: Use appropriate factor(s) from the tables provided. Round the PV factors to 4 decimals. The following information is available: Jinny has identified a suitable location for her business in a new shopping center in George Town, capital of the Cayman Islands. The developer has units of 1,000 square feet arid 3,750 square feet available and is willing to sell either unit for CI$150 per square foot (CI$1.00 US$1.25). Alternatively, the space can be leased at a cost of CI$1.80 per square foot per month, on an annual basis. Commercial real estate values have more than doubled in Grand Cayman during the past 10 years, with no slowdown in sight. As a result, Jinny is more attracted to the purchase option because she expects the price per square foot to be CI$450 by the time she is ready to sell her unit in 10 years. Exercise machines and other equipment necessary to open the fitness center would cost US$52,000. In addition, US$23,000 would need to be invested in equipment related to the health spa. The useful life for all such equipment is 10 years, and the expected salvage value is not large enough to be concerned about. In addition, US$9,000 would need to be invested in an inventory of cosmetics and skin care products necessary to operate the health spa. This level of inventory would need to be maintained throughout the 10-year period and will be given away to loyal customers when Jinny retires permanently. The health spa can be operated in the 1,000-square-foot unit. Variable operating costs would include CI$0.15 per square foot per month for cleaning and CI$0.40 per square foot per month for utilities. The 3,750-square-foot unit is large enough to operate both the fitness center and health spa, and the CI$0.15 rate per square foot for cleaning would not change. However, if the 3,750-square- foot unit were used, the health spa would be located in an open loft that would need to be air-conditioned at all times. As a result, utility costs are expected to be CI$0.60 per square foot per month under this option. Jinny is a certified aesthetician and expects to do most of the makeovers, facials, and peels herself, but she needs a qualified assistant for the health spa. She estimates that hiring an appropriate person will cost US$22,000 per year. Likewise, for the fitness center, two full-time aerobics instructors would be hired for US$22,000 each per year, and a physical trainer would be hired for US$31,000 per year. Additional fixed costs include US$3,500 per year for advertising and US$4,400 per year for maintenance, insurance, and other items. These costs will be incurred without respect to the size of operations. Annual membership fees to the fitness center will be CI$250, and a preliminary market survey shows a demand of approximately 550 initial members. Although members tend to come and go, the net change in membership from year to year is not expected to be significant. No additional fees will be charged to fitness center members. Health spa fees are assessed on a user basis, although the steam room facilities are available at no charge to fitness center members. The net cash inflow from cosmetics and skin care products (after deducting the cost of inventory used and sold) is expected to be CI$5,750 per month. Jinny's cost of capital is 10%, and there are no taxes in the Cayman Islands. Required: a. Calculate the net present value in US$ of an investment in the health spa only, assuming that the 1,000-square-foot unit is purchased and then resold at the end of 10 years. (Hint: Before making your present value calculations, multiply all amounts expressed in CI$ by $1.25 to convert into US$.) b. Calculate the net present value in US$ of an investment in the fitness center and health spa, assuming that the 3,750-square-foot unit is purchased and then resold at the end of 10 years. c. Jinny is quite concerned about possible forecasting errors and has asked you to prepare a more conservative estimate. Repeat part b, assuming that the fitness center attracts only 350 members per year (rather than 550); that the net cash inflow per month from cosmetics and skin care products is only CI$3,750 per month (rather than CI$5,750 per month); and that commercial real estate values in Grand Cayman at the end of 10 years are only CI$200 per square foot (rather than CI$450 per square foot) d. Choose why it might be in Jinny's best interest to lease (rather than purchase) the 1,000-square-foot unit if she initially decides to open the health spa only. Although no calculations are required, you should consider both quantitative and qualitative factors in your response. Complete this question by entering your answers in the tabs below. Required A Required B Required C Required D Calculate the net present value in US$ of an investment in the health spa only, assuming that the 1,000-square-foot unit is purchased and then resold at the end of 10 years. (Hint: Before making your present value calculations, multiply all amounts expressed in CIS by $1.25 to convert into US$.) Net present value Required A Required B > Table 6-5: Factors for Calculating the Present Value of an Annuity of $1 Number of Periods Discount Rate 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% 1 0.980 0.9615 0.9434 0.9259 0.9091 0.8929 0.8772 0.8621 0.8475 0.8333 2 1.942 1.8861 1.8334 1.7833 1.7355 1.6901 1.6467 1.6052 1.5656 15278 3 2.884 2.7751 2.6730 2.5771 2.4869 2.4018 2.3216 2.2459 2.1743 2.1065 4 3.808 3.6299 3.4651 3.3121 3.1699 3.0373 2.9137 2.7982 2.6901 2.5887 3 4.713 44518 4.2124 3.9927 3.7908 3.6048 34331 3.2743 3.1272 2.9906 6 5.601 5.2421 4.9173 4.6229 4.3553 4.1114 7 6472 6.0021 5.5824 5.2064 4.8684 4.5638 B 7.325 6.7327 6.2098 5.74661 5.3349 4.9676 4.2883 4.6389 3.8887 3.6847 4.0386 3.4976 3.3255 3.8115 3.6046 43436 4.0776 3.8372 9 8.162 7.4353 6.8017 6.2469 5.7590 5.3282 4.9464 10 8.983 8.1109 73601 6.7101 6.1446 5.6502 11 9.787 8.7605 7.8869 7.1390 12 10.575 9.3851 8.3838 7.5361 13 11.348 9.9856 8.8527 7.9038 34 12.106 10.5631 9.2950 8.2442 15 12.849 11.1184 9.7122 8.5595 7.6061 6.8109 16 13.578 11.6523 10.1059 8.8514 7.8237 6.9740 4.6065 5.2161 4.8332 6.4951 5.9377 5.4527 5.0286 4.6560 6.8137 6.1944 5.6603 5.1971 4.7932 7.1034 64235 5.8424 5.3423 4.9095 4.5327 7.3667 6.6282 6.0021 5.4675 5.0081 4.6106 6.1422 5.5755 5.0916 4.6755 6.2651 4.3030 4.0310 44941 4.1925 4.3271 4.4392 5.6685 5.1624 4.7296 17 14.292 12.1657 10.4773 9.1216 8.0216 7.1196 6.3729 5.7487 5.2223 4.7746 18 14.992 12.6593 10.8276 9.3719 8.2014 7.2497 6.4674 5.8178 5.2732 4.8122 19 15.678 13.1339 11.1581 9.6036 8.3649 7.3658 6.5504 5.8775 5.3162 4.8435 20 16351 13.5903 11.4699 21 17.011 14.0292 11.7641 9.8181 10.0168 8.6487 8.5136 7.4694 6.6231 75620 6.6870 5.9288 5.3527 4.8696 5.9731 5.3837 4.8913 22 17.658 14.4511 12.0416 10.2007 8.7715 7.6446 6.7429 6.0113 5.4099 4.9094 23 18.292 14.8568 12.3034 10.3711 8.8832 7.7184 6.7921 6.0442 5.4321 49245 24 18.914 15.2470 12.5504 10.5288 8.9847 7.7843 6.8351 6.0726 5.4509 4.9371 25 19.523 15.6221 12.7834 10.6748 9.0770 7.8431 6.8729 6.0971 5.4669 49476 30 22.396 17.2920 13.7648 11.2578 9.4269 8.0552 7.0027 6.1772 5.5168 4.9789 35 24.999 18.6646 14.4982 11.6546 9.6442 8.1755 7.0700 6.2153 5.5386 4.9915 40 27.355 19.7928 45 29 490 207200 50 31.424 15.0463 15.4558 214822 15.7619 11.9246 12.1084 9.8628 12.2335 99148 8.3045 9.7791 8.2438 8.2825 7.1050 6.2335 5.5482 4.9966 7.1232 6.2421 7.1327 6.2463 5.5523 4.9986 5.5541 4.9995 Table 6-4: Factors for Calculating the Present Value of $1 Number of Periods Discount Rate 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% 1 0.980 0.9615 0.9434 0.9259 0.9091 0.8929 0.8772 0.8621 0.8475 0.8333 2345678910121 0.961 0.9246 0.8900 0.8573 0.8264 0.7972 0.7695 0.7432 0.7182 0.6944 0.942 0.8890 0.8396 0.7938 0.7513 0.7118 0.6750 0.6407 0.6086 0.5787 0.924 0.8548 0.7921 0.7350 0.6830 0.6355 0.5921 0.5523 0.5158 0.4823 0.906 0.8219 0.7473 0.6806 0.6209 0.5674 0.5194 0.4761 0.4371 0.4019 0.888 0.7903 0.7050 0.6302 0.5645 0.5066 0.4556 0.4104 0.3704 0.3349 0.871 0.7599 0.6651 0.5835 0.5132 0.4523 0.3996 0.3538 0.3139 0.2791 0.853 0.7307 0.6274 0.5403 0.4665 0.4039 0.3506 0.3050 0.2660 0.2326 0.837 0.7026 0.5919 0.5002 0.4241 0.3606 0.3075 0.2630 0.2255 0.1938 10 0.820 0.6756 0.5584 0.4632 0.3855 0.3220 0.2697 0.2267 0.1911 0.1615 0.804 0.6496 0.5268 0.4289 0.3505 0.2875 0.2366 0.1954 0.1619 0.1346 0.788 0.6246 0.4970 0.3971 0.3186 0.2567 0.2076 0.1685 0.1372 0.1122 0.773 0.6006 0.4688 0.3677 0.2897 0.2292 0.1821 0.1452 0.1163 0.0935 14 0.758 0.5775 0.4423 0.3405 0.2633 0.2046 0.1597 0.1252 0.0985 0.0779 15 0.743 0.5553 0.4173 0.3152 0.2394 0.1827 0.1401 0.1079 0.0835 0.0649 16 0.728 0.5339 0.3936 0.2919 0.2176 0.1631 0.1229 0.0930 0.0708 0.0541 17 0.714 0.5134 0.3714 0.2703 0.1978 0.1456 0.1078 0.0802 0.0600 0.0451 18 0.700 0.4936 0.3503 0.2502 0.1799 0.1300 0.0946 0.0691 0.0508 0.0376 19 0.686 0.4746 0.3305 0.2317 0.1635 0.1161 0.0829 0.0596 0.0431 0.0313 20 0.673 0.4564 0.3118 0.2145 0.1486 0.1037 0.0728 0.0514 0.0365 0.0261 21 0.660 0.4388 0.2942 0.1987 0.1351 0.0926 0.0638 0.0443 0.0309 0.0217 22 0.647 0.4220 0.2775 0.1839 0.1228 0.0826 0.0560 0.0382 0.0262 0.0181 23 0.634 0.4057 0.2618 0.1703 0.1117 0.0738 0.0491 0.0329 0.0222 0.0151 24 0.622 0.3901 0.2470 0.1577 0.1015 0.0659 0.0431 0.0284 0.0188 0.0126 25 0.610 0.3751 0.2330 0.1460 0.0923 0.0588 0.0378 0.0245 0.0160 0.0105 30 0.552 0.3083 0.1741 0.0994 0.0573 0.0334 0.0196 0.0116 0.0070 0.0042 35 0.500 0.2534 0.1301 0.0676 0.0356 0.0189 0.0102 0.0055 0.0030 0.0017 40 0.453 0.2083 0.0972 0.0460 0.0221 0.0107 0.0053 0.0026 0.0013 0.0007 45 0410 0.1712 0.0727 0.0313 0.0137 0.0061 0.0027 0.0013 0.0006 0.0003 50 0.372 0.1407 0.0543 0.0213 0.0085 0.0035 0.0014 0.0006 0.0003 0.0001