You are the owner of a rock climbing gym in Colorado You want to expand your facility to have more area for roped climbing and a dedicated space for birthday parties and business events The expansion will cost $3,000,000 which will be financed with a loan Loan details Your loan is a 3 year loan Your total interest payment is $140,000 You must repay 1 3 of the total interest at the end of each of the first 3 years You must repay the loan principal at the end of the third year The construction takes 1 year The expanded facility will last 10 years and its salvage value at the end of the 10 years of operation is equal to 20 of the expansion cost You are allowed to take straight line depreciation for the first 3 years after completion Remember Straight line depreciation (Expansion cost Salvage value) Number of years depreciation is allowed Your taxable income is taxed at 21 After completion of the expansion, you expect to host 100 parties or events each year The average revenue for each party is $800 You also expect to gain an additional 500 members at the gym Each member pays $1,500 per year Once open, you estimate that you will have to hire more workers to help with the parties and events, manage the new members, etc and purchase new climbing holds and ropes This will cost you $200,000 each year Your discount rate is 6 Answer the following questions In an excel spreadsheet Build one table carefully detailing the revenue, expenses, depreciation, etc and costs of the expansion You can use a spreadsheet from the module as a base Choose carefully In these tables, correctly calculate the present value for each year and the NPV total Based on your calculation, what year you start to become profitable Ultimately, should you expand the business What was your decision making process and which data did you use to decide to expand not expand the business Hints Net income ( income after taxes) for year 1 $ 46,667 Taxes for year 4 $0 EBIT for year 8 $630,000 Taxes for year 8 $132,300 NPV of investment for year 11 $578,255

The Answer is in the image, click to view ...

Answered step by step

Verified Expert Solution

Link Copied!

Question

1 Approved Answer

Posted on Jun 21, 2024

You are the owner of a rock climbing gym in Colorado. You want to expand your facility to have more area for roped climbing and

You are the owner of a rock climbing gym in Colorado. You want to expand your facility to have more area for roped climbing and a dedicated space for birthday parties and business events.

The expansion will cost $3,000,000 which will be financed with a loan
Loan details: Your loan is a 3-year loan. Your total interest payment is $140,000. You must repay 1/3 of the total interest at the end of each of the first 3 years. You must repay the loan principal at the end of the third year.
The construction takes 1 year
The expanded facility will last 10 years and its salvage value at the end of the 10 years of operation is equal to 20% of the expansion cost
You are allowed to take straight-line depreciation for the first 3 years after completion.
- Remember: "Straight line" depreciation = (Expansion cost - Salvage value) / Number of years depreciation is allowed
Your taxable income is taxed at 21%
After completion of the expansion, you expect to host 100 parties or events each year. The average revenue for each party is $800.
You also expect to gain an additional 500 members at the gym. Each member pays $1,500 per year.
Once open, you estimate that you will have to hire more workers to help with the parties and events, manage the new members, etc. and purchase new climbing holds and ropes. This will cost you $200,000 each year.
Your discount rate is 6%

Answer the following questions:

In an excel spreadsheet:
- Build one table carefully detailing the revenue, expenses, depreciation, etc. and costs of the expansion
- You can use a spreadsheet from the module as a base. Choose carefully!
In these tables, correctly calculate the present value for each year and the NPV total.
Based on your calculation, what year you start to become profitable? Ultimately, should you expand the business? What was your decision-making process and which data did you use to decide to expand/not expand the business?

Hints: