The membership fees are set at a flat rate of $70 per month. You estimate that the gym will have approximately 250 members in the first year, 300 in the second year and 500 in the third year.

Under the franchise agreement, John will have to pay a royalty payment equal to 7% of sales. He will also have to contribute 4% of sales towards the marketing costs of the franchisor.

Monthly rental estimate is $3500. Utility estimate is $1,500 per month.

John needs to employ a full-time manager and two (2) casuals to look after the gym during the

week. No staff are needed during the weekends. The manager's wage is estimated to be

$50,000 per annum plus 9.5% superannuation. The total hours for two (2) casuals are

approximately 25 hours per week at a rate of $25 per hour plus 9.5% superannuation.

The gym equipment costs $120,000 and is expected to depreciate over a six-year useful life on

a straight-line basis. Besides the cost of the equipment, John also incurs other initial

investments such as initial franchise fee, grand opening, etc. which totals to $200,000.

John finances the franchise using his own savings. You estimate the cost of capital to be 16%.

Assume John incurs a tax rate of 30% and assume no inflation in prices or wages.

Estimate the free cash flow the franchise generates each year for the first three years of operation.

Free Cash Flow = Net Profit + Depreciation (1-tax rate) + Interest (1-tax rate).