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 facts:

• 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:

1. 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!
2. In these tables, correctly calculate the present value for each year and the NPV total.
3. 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?

3 points extra credit: Suppose that you are unsure of how many parties and events will be demanded each year. If you are confident in the rest of your assumptions related to the expansion, what is the minimum of parties per year to result in NPV total = 0?

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