Suppose you are the owner and manager of Whittier Fitness, a very popular gym in Whittier. As of your most recent fiscal year, you had 858 members. Your operating income last year was $320,000. Because your gym has a basketball court that is not getting much use right now, you are thinking whether you should offer basketball lessons to for an additional fee. This is the information that you have collected:

• You have twelve years remaining on your lease of the building, which includes the basketball court. Once your lease is up, you plan to close the business and to retire.
• If you were to go ahead with this project, you will estimate that you need to spend $180,000 in new equipment right away. You will treat this investment as capital expenditure and depreciate it in a straight line over twelve years to a salvage value of zero.
• You plan to hire a former professional player to give the lessons; you will pay her a modest annual salary of $85,000 for the next twelve years.
• You expect to generate $150,000 from these lessons each year. Your contract with the instructor stipulates that you only keep 80% of these revenues; the instructor gets the other 20% (this is in addition to her salary).
• The cost of capital of sports facilities is 7% and the marginal tax rate is 35%.

a. Estimate the NPV of adding the basketball lessons. Show your work.

b. As you can imagine, the lessons will add some wear and tear on the basketball court. As a result, you will need to repair the wooden floor twice, once at the end of third year and once at the end of seventh year, at a cost of $35,000 each time. Had you not offered these lessons, you would not need to repair the floor. How much will your NPV (from part a) change as a result of adding the lessons? [Assume that the resurfacing can be expensed.] Show your work.