Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

You have been observing the increased health awareness of Australians for some time and, in view of this, have decided to establish and run

image text in transcribed

You have been observing the increased health awareness of Australians for some time and, in view of this, have decided to establish and run a fitness centre. You estimate that initial cash outflows will include: $50,000 to renovate the gym premises; $45,000 for new equipment; and, $5,000 to install the equipment. You have done a market survey which leads you to believe that you will get 500 members each paying $1,000 in membership fees per year. You have also found 5 gym instructors you can hire at a cost of $30,000 per year. You also estimate additional costs of running the gym to be $200,000 per year. For tax reasons, you have decided to expense the renovation costs and depreciate the equipment over five years using the straight-line method (NB. Given the nature of the gym equipment, you don't think it will be worth anything at the end of this time so have decided to calculate depreciation using a salvage value of zero). However, you expect the equipment will be fully functional for 10 years and are actually assessing the viability of setting up the gym for a 10 year period. Assuming that the initial investment is made today, all cash flows are received or paid at the end of the year, the tax rate is 40% and your six-month required rate of return is 6%, should you invest in the project? Why?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

International Financial Management

Authors: Cheol S. Eun, Bruce G.Resnick

6th Edition

71316973, 978-0071316972, 78034655, 978-0078034657

More Books

Students also viewed these Finance questions