Bold’s Gym, a health club chain, is consider-ing expanding into a new location: the initial investment would be $1 million in equipment, renovation, and a 6-year lease, andits annual upkeep and expenses would be $75,000 (paid at thebeginning of the year). Its planning horizon is 6 years out, andat the end, it can sell the equipment for $50,000. Club capacityis 500 members who would pay an annual fee of $600. Bold’sexpects to have no problems filling membership slots. Assumethat the interest rate is 10%. (See Table S7.2 .)a) What is the present value profit/loss of the deal? b) The club is considering offering a special deal to the mem-bers in the first year. For $3,000 upfront they get a full 6-year membership (i.e., 1 year free). Would it make financial sense tooffer this deal?

Bold’s Gym, a health club chain, is consider-ing expanding into a new location: the initial investment would be $1 million in equipment, renovation, and a 6-year lease, andits annual upkeep and expenses would be $75,000 (paid at thebeginning of the year). Its planning horizon is 6 years out, andat the end, it can sell the equipment for $50,000. Club capacityis 500 members who would pay an annual fee of $600. Bold’sexpects to have no problems filling membership slots. Assumethat the interest rate is 10%. (See Table S7.2 .)a) What is the present value profit/loss of the deal? b) The club is considering offering a special deal to the mem-bers in the first year. For $3,000 upfront they get a full 6-year membership (i.e., 1 year free). Would it make financial sense tooffer this deal?

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter11: Capital Budgeting Decisions

Section: Chapter Questions

Problem 10PA: The Ham and Egg Restaurant is considering an investment in a new oven that has a cost of $60,000,...

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Concept explainers

Production Budget

A budget can be defined as a financial plan designed by an undertaking for a definite period in the future that can contribute towards enhancing the financial success of the business undertaking. It is used to estimate the revenue and expenses. The budget generally takes into account both current and future income and expenses.

Question

Bold’s Gym, a health club chain, is consider-
ing expanding into a new location: the initial investment would

be $1 million in equipment, renovation, and a 6-year lease, and
its annual upkeep and expenses would be $75,000 (paid at the
beginning of the year). Its planning horizon is 6 years out, and
at the end, it can sell the equipment for $50,000. Club capacity
is 500 members who would pay an annual fee of $600. Bold’s
expects to have no problems filling membership slots. Assume
that the interest rate is 10%. (See Table S7.2 .)
a) What is the present value profit/loss of the deal?

b) The club is considering offering a special deal to the mem-
bers in the first year. For $3,000 upfront they get a full 6-year

membership (i.e., 1 year free). Would it make financial sense to
offer this deal?

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