You have been observing the progressive gentrification of you city with interest
ID: 2626001 • Letter: Y
Question
You have been observing the progressive gentrification of you city with interest. You realize that the time is ripe for you to open and run an aerobic exercise center. You find an abandoned warehouse which will meet your needs and rents for $40196/ year. You estimate that it will initially cost $47779 to renovate the place and buy Cybex equipment for the center (there will be no salvage and the entire initial cost is depreciable). Your market research indicates that you can expect to get 490 members, each paying $512/year. You have also found five instructors you can hire for $30645 a year each. Your tax rate, if you start making profits, will be 38%, and you choose to use straight line depreciation on your initial investment. If your cost of capital is 14% and you expect to retire to the Belize in 11 years, determine the NPV.
Explanation / Answer
Initial Cost = $47,779
Salvage Value = 0
Useful Life = 11 years
Depreciation expense = 47779 / 11 = $4343.55
Rent = $40196
Revenue per member = $512
Total Revenue = 512*490 = $250,880
Cost of 1 instructor = $30,645
Cost of 5 instructors = 30645*5 = $153,225
Total Cost = 153225 + 40196 = $193,421
Profit before Taxes = Total revenue - Total Cost - Depreciation Expense = $53,115.45
Profit after Taxes = (1-0.38) * 53115.45 = $32,931.58
Net Cashflow after taxes = Profit after Taxes + Depreciation = 32931.58 + 4343.55 = $37275.13
NPV
Cosy of capital = 14%
PV of future cashflows = -PV(0.14,11,37275.13) = $203,251.33
NPV = PV of future cashflows - Initial Cost = 203251.33 - 47779 = $155,472.33
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