You have been observing the progressive gentrification of your city with interest. You realize that the...

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You have been observing the progressive gentrification of yourcity with interest. You realize that the time is ripe for you toopen and run an aerobic exercise center. You find an abandonedwarehouse which will meet your needs and rent for $58,000/year. Youestimate that it will initially cost $130,000 to renovate the placeand buy Nautilius equipment for the center. You will depreciate theequipment using straight-line depreciation toZERO. You have spent $15,000 on market research,which indicates that you can expect to get 400 members, each paying$500/year. You have also found five instructors you can hire for$24,000 a year each. Your tax rate, if you start making profits,will be 40% and you choose to use straight-line depreciation onyour initial investment. If your cost of capital is 15% and youexpect to retire to the Bahamas in 10 years. You expect that youwill be able to sell the equipment for $50,000 in 10 years.

Estimate the net present value and internal rate of return for thisinvestment. Would you take it?

Answer & Explanation Solved by verified expert

3.8 Ratings (723 Votes)

Depreciation on initial investment Initial costUseful life 13000010 13000 Computation of annual cash inflow Revenue 500 x 400 200000 Less Cost Rent 58000 Salaries for instructors 24000 Total cost 82000 Gross profit 118000 Less Depreciation 13000 PBT 105000 Tax 40 42000 Net profit 63000 See Answer

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Transcribed Image Text

You have been observing the progressive gentrification of yourcity with interest. You realize that the time is ripe for you toopen and run an aerobic exercise center. You find an abandonedwarehouse which will meet your needs and rent for $58,000/year. Youestimate that it will initially cost $130,000 to renovate the placeand buy Nautilius equipment for the center. You will depreciate theequipment using straight-line depreciation toZERO. You have spent $15,000 on market research,which indicates that you can expect to get 400 members, each paying$500/year. You have also found five instructors you can hire for$24,000 a year each. Your tax rate, if you start making profits,will be 40% and you choose to use straight-line depreciation onyour initial investment. If your cost of capital is 15% and youexpect to retire to the Bahamas in 10 years. You expect that youwill be able to sell the equipment for $50,000 in 10 years.Estimate the net present value and internal rate of return for thisinvestment. Would you take it?