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 13 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 1,500 square feet and 2,500 square feet available and is willing to sell either unit for CI$125 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 13 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$375 by the time she is ready to sell her unit in 13 years.
• Exercise machines and other equipment necessary to open the fitness center would cost US$39,000. In addition, US$28,000 would need to be invested in equipment related to the health spa. The useful life for all such equipment is 13 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 13-year period and will be given away to loyal customers when Jinny retires permanently.
• The health spa can be operated in the 1,500-square-foot unit. Variable operating costs would include CI$0.20 per square foot per month for cleaning and CI$0.40 per square foot per month for utilities. The 2,500-square-foot unit is large enough to operate both the fitness center and health spa, and the CI$0.20 rate per square foot for cleaning would not change. However, if the 2,500-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$21,000 each per year, and a physical trainer would be hired for US$28,000 per year.
• Additional fixed costs include US$4,000 per year for advertising and US$4,800 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$350, and a preliminary market survey shows a demand of approximately 450 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$6,750 per month.
• Jinny's cost of capital is 12%, and there are no taxes in the Cayman Islands.

Required:

1. Calculate the net present value in US$ of an investment in the health spa only, assuming that the 1,500-square-foot unit is purchased and then resold at the end of 13 years. (Hint: Before making your present value calculations, multiply all amounts expressed in CI$ by $1.25 to convert into US$.)
2. Calculate the net present value in US$ of an investment in the fitness center and health spa, assuming that the 2,500-square-foot unit is purchased and then resold at the end of 13 years.
3. 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 250 members per year (rather than 450); that the net cash inflow per month from cosmetics and skin care products is only CI$4,750 per month (rather than CI$6,750 per month); and that commercial real estate values in Grand Cayman at the end of 13 years are only CI$200 per square foot (rather than CI$375 per square foot)
4. Choose why it might be in Jinny's best interest to lease (rather than purchase) the 1,500-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.

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
2	0.961	0.9246	0.8900	0.8573	0.8264	0.7972	0.7695	0.7432	0.7182	0.6944
3	0.942	0.8890	0.8396	0.7938	0.7513	0.7118	0.6750	0.6407	0.6086	0.5787
4	0.924	0.8548	0.7921	0.7350	0.6830	0.6355	0.5921	0.5523	0.5158	0.4823
5	0.906	0.8219	0.7473	0.6806	0.6209	0.5674	0.5194	0.4761	0.4371	0.4019
6	0.888	0.7903	0.7050	0.6302	0.5645	0.5066	0.4556	0.4104	0.3704	0.3349
7	0.871	0.7599	0.6651	0.5835	0.5132	0.4523	0.3996	0.3538	0.3139	0.2791
8	0.853	0.7307	0.6274	0.5403	0.4665	0.4039	0.3506	0.3050	0.2660	0.2326
9	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
11	0.804	0.6496	0.5268	0.4289	0.3505	0.2875	0.2366	0.1954	0.1619	0.1346
12	0.788	0.6246	0.4970	0.3971	0.3186	0.2567	0.2076	0.1685	0.1372	0.1122
13	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

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	1.5278
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
5	4.713	4.4518	4.2124	3.9927	3.7908	3.6048	3.4331	3.2743	3.1272	2.9906
6	5.601	5.2421	4.9173	4.6229	4.3553	4.1114	3.8887	3.6847	3.4976	3.3255
7	6.472	6.0021	5.5824	5.2064	4.8684	4.5638	4.2883	4.0386	3.8115	3.6046
8	7.325	6.7327	6.2098	5.7466	5.3349	4.9676	4.6389	4.3436	4.0776	3.8372
9	8.162	7.4353	6.8017	6.2469	5.7590	5.3282	4.9464	4.6065	4.3030	4.0310
10	8.983	8.1109	7.3601	6.7101	6.1446	5.6502	5.2161	4.8332	4.4941	4.1925
11	9.787	8.7605	7.8869	7.1390	6.4951	5.9377	5.4527	5.0286	4.6560	4.3271
12	10.575	9.3851	8.3838	7.5361	6.8137	6.1944	5.6603	5.1971	4.7932	4.4392
13	11.348	9.9856	8.8527	7.9038	7.1034	6.4235	5.8424	5.3423	4.9095	4.5327
14	12.106	10.5631	9.2950	8.2442	7.3667	6.6282	6.0021	5.4675	5.0081	4.6106
15	12.849	11.1184	9.7122	8.5595	7.6061	6.8109	6.1422	5.5755	5.0916	4.6755
16	13.578	11.6523	10.1059	8.8514	7.8237	6.9740	6.2651	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	16.351	13.5903	11.4699	9.8181	8.5136	7.4694	6.6231	5.9288	5.3527	4.8696
21	17.011	14.0292	11.7641	10.0168	8.6487	7.5620	6.6870	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	4.9245
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	4.9476
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