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Bob is the owner of a sporting club. In the last few years, the club has been extraordinarily successful Bob senses that he can make additional money from increasing the capacity of his club by purchasing additional equipment. The cost of an additional 30 items is equal to $40,000 and there is $5,000 in set-up and installation costs. With this investment, Bob estimates that he would still need to increase his inventory by $10,000 by purchasing additional misc. equipment and extend credit for fees to potential professional players equal to $5,000. Bob also anticipates an increase in incremental liabilities equal to $3,000, reflecting the credit he receives from his suppliers. He anticipates recouping 100 percent of his additional investment in working capital at the end of year 5. From his coaching experience, Bob knows that equipment will only last for five years after which they become obsolete. They also have no salvage value.

With the enlarged capacity to train additional individuals, Bob anticipates increasing his sales by $20,000 per year in the first two years. In years 3-5, he expects that sales would reach $35,000 per year by increasing the brand awareness of his club nationally. The increase in operating expenses is estimated to be 20 percent of the annual change in sales. Assume that the marginal tax rate is 40 percent Bob's discount rate is 20 percent. Additionally, do not apply the half-year convention rule (amortization at 20 percent per year under the straight-line method).

Is it recommended for Bob to add the new equipment to his club?

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