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You have been observing the overweight faculty at BUwith interest. You realize that the time is ripe for you to start and run an aerobic

You have been observing the overweight faculty at BUwith interest. You realize that the time is ripe for you to start and run an aerobic exercise center just for faculty. You find an abandoned warehouse nearby which will meet your needs and rents for $48000/ year. You estimate that it will initially cost $500,000 to renovate the place and buy Nautilus equipment for the center. (the entire initial cost is depreciable to zero) You have done a market survey which leads you to believe that you will get 500 members each paying $500/year. You have also found 5 instructors you can hire for $28000/year apiece. Your tax rate if you start making profits will be 25% and you choose to use straight line depreciation on your initial investment. You expect to retire to the Bahamas after ten years in the business and your partner will then sell the used equipment in year 11 for $100,000.All dollars mentioned are REAL.

Your discount rate is 15% nominal. Inflation is 2% per year.

(a)Find the NPV to see if this a good investment.

(b) Describe any adjustments you made or did not make to accommodate nominal or Real values and why.

(c)How many members do you need to have each year to exactly "break even" ?

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