question 1-4

suppose you are planning to expand your rersonal Fitness Center. You own the current space you use, but have extra unused space in the building. You are thinking about buying new equipment and hiring an assistant to help with new clients. Here are the assumptions to use: 1. The cost of equipment (weights, treadmill, etc.) is estimated to be $90,000 2. The bank has offered a loan at 6% for 5 years, although you do have $90,000 in savings. 3. Your friend has offered to rent your spare space for $1000 per month (for the next 5 years). 4. You think you could hire an assistant (including benefits) for $40,000 per year. 5. You plan to spend an additional $5000 in advertising annually to attract new clients. 6. You estimate that you will attract 100 new clients as a result of the expansion (some may come & go over the 5-year period) and keep 100 clients, on average, each year. You currently charge $60 per month for each client. I've provided a Excel spreadsheet template to start. You'll need to calculate the expected cash flow as a result of this analysis for the next 5 years the payback period you'd like to use. (One reason I've provided this template is to remind you that by organizing your information and then using cells in your formulas, you can do a sensitivity analysis very easily by just changing values in cells.) To deliver: 1. The Excel spreadsheet showing your calculations. Assume you use your savings for this part of the analysis. Based on a 5-year window, what is the NPV of this project? Is this a viable project? Why/Why not? 2. How does your NPV change if you adjust: the discount rate? The number of new clients? The rate you charge? That is, how sensitive is your answer in part 1 to possible variables in the project? 3. Suppose that at the end of 5 years you can sell the equipment for $20,000. How does this salvage value affect your decision? 4. If you could take your $90,000 and put it in an exchange traded fund (ETFs earn the stock market's average and have very low fees) and earn, say 7% annually (on average), would this be smart? 5. Copy your current worksheet and create a new one for this next part. Name this new sheet "Taxes". How does the story change if we include taxes? Let's make one other adjustment: you think you can attract 120 new clients each paying the $60 monthly fee. What happens to the project's viability? (Notice that we haven't included the firm's overall tax rate on the cash flow from the original firm....only what might relate to this expansion.) BC E 1 Cost of equipment 3 4 5 6 7 Expansion expenses salary & benefits est. overhead advertising Total expense due to expansion 9 Expansion revenue 10 new clients 100 $60 12 13 annual rev due to expansion Format putted Cash Flow due to expansion 16 17 Discount Rate 19 NPV Analysis 20 periods 21 22 23 Present Value 24 25 NPV= (using the excel formula) 26 NPV= (using PV cash flow-cost) 27 cell B25 should = cell B26 28 29 Salvage Value