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 and can either be self-funded or you can take out a loan. The construction takes 1 year. The expanded facility will last 15 years and its salvage value at the end of the 15 years is equal to 10% of the expansion cost. You are allowed to take straight-line depreciation for the first 5 years after completion. Your taxable income is taxed at 21%.

• Loan option details: Your loan is a 4-year loan. Your total interest payment is $210,000. You must repay 1/4 of the total interest at the end of each of the first 4 years. You must repay the loan principal at the end of the fourth year.

After completion of the expansion, you expect to host 170 parties or events each year. The average revenue for each party is $800. You also expect to gain an additional 450 members at the gym. Each member pays $1,400 per year. Once open, you estimate that you will have to hire more workers to help with the parties and events. This will cost you $125,000 each year.

Your discount rate is 5%

Answer the following questions:

1. In an excel spreadsheet:
   • Loan option: Build one table carefully detailing the revenue, expenses, depreciation, etc. and costs of the loan option.
   • Self-fund option: Build a second table with the same information related to revenue, expenses, depreciation, etc. but now detailing the self-fund option.
2. In these tables, correctly calculate the NPV for both options.
3. Is there a difference between the NPV for the loan and the self-fund options? Why? (hint: read your book.)
4. Based on your calculation, should you expand? If so, should you take out a loan or self-fund?

Hints (updated 12/3):

• Net income (= income after taxes) for year 3, loan option = $38,315, self-fund option = $79,790.
• Taxes for year 6 for both loan and self-fund = $21,210
• Taxes for year 7 for both loan and self-fund = $134,610
• NPV of investment for year 14 for both loan and self-fund = $255,761