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You have decided to cash in on the fitness craze in your town, so you are thinking about setting up a gym. You can rent
You have decided to cash in on the fitness craze in your town, so you are thinking about setting up a gym. You can rent a warehouse close to the business district for $30 000 p.a. In order to attract the 'right' sort of clientele, you will need to spend $90 000 on redecorating and installing mirrors on all surfaces. You will also purchase some equipment at a cost of $40 000. Both of these outlays can be depreciated straight line over a 4 year effective life. You expect that the equipment can be sold at the end of four years for $6000. Your market research suggests you can attract and maintain 400 members. Each would pay an annual membership fee of $800. Instructors are usually paid a salary of $25 000 p.a. and you would employ 4 of these to keep the gym operating 7 days a week. Your marginal tax rate is 50% and you will operate the business for 4 years before retiring. The cost of capital is 14% Required: Estimate the relevant cash flows for the project Estimate the payback period Calculate the NPV for the project and explain whether you should continue with this projects Calculate NPV, IRR and Payback periods and analysis and conclusions
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