The Charles Barkley Fitness Club is looking to expand its current facility by adding space for more weights,cardio equipment, and a made-to-order donut bar. The expansion and equipment investments will cost $900,000 initially and have a useful life of 15 years and a salvage value of $15,000. The additional area willattract 500 customers a year, paying $20 a month, but will cost an additional $20,000 annually to maintain.Due to Barkleys credit, the cost of capital is only 6%. Charles Barkley is in the 35% tax bracket. Is this a wiseinvestment? Show all work to illustrate your answer.

NPV is the most used method for analysis of projects based time value of money and it should be…

Answered: The Charles Barkley Fitness Club is…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Similar questions

The Ocean City water park is considering the purchase of a new log flume ride. The cost to purchase the equipment is $8,000,000, and it will cost an additional $475,000 to have it installed. The equipment has an expected life of 6 years, and it will be depreciated using a MACRS 7-year class life. Management expects to run about 150 rides per day, with each ride averaging 35 riders. The season will last for 120 days per year. In the first year, the ticket price per rider is expected to be $5.25, and it will be increased by 4% per year. The variable cost per rider will be $1.65, and total fixed costs will be $525,000 per year. After six years, the ride will be dismantled at a cost of $245,000 and the parts will be sold for $600,000. The cost of capital is 8.5%, and its marginal tax rate is 25%. Calculate the NPV, IRR, and MIRR of the new equipment. Is the project acceptable?
A proposed bridge on the interstate highway is being considered at the cost of 4 million dollars. It is expected that the bridge will have a life of 30 years. Construction costs will be paid by government agencies. Operation and maintenance costs are estimated to be $250,000 per year. Benefits to the public are estimated to be $900,000 per year. The building of the bridge will result in an estimated cost of $250,000 per year to the general public. The project requires a return of 5%. Determine the benefit/cost (B/C) ratio.
A proposal is being considered to improve an existing road connecting two medium size cities in West Africa to reduce transportation costs. The cost of the project is $1,000,000. Present annual transportation cost for all traffic amounts to $1,270,000 per year and would continue if no improvement is made. After the improvement, annual transportation costs are estimated to be $1,166,000. Assume the life of the project 20 years, and MARR is 12%. Should the project be undertaken? Evaluate this proposal by using the net present value method, benefit/cost method, and internal rate of return method. Assume costs appear at the beginning of each year while benefits at the end of a year.
The Ocean City water park is considering the purchase of a new log flume ride. The cost to purchase the equipment is $8,000,000, and it will cost an additional $475,000 to have it installed. The equipment has an expected life of 6 years, and it will be depreciated using a MACRS 7-year class life. Management expects to run about 150 rides per day, with each ride averaging 35 riders. The season will last for 120 days per year. In the first year, the ticket price per rider is expected to be $5.25, and it will be increased by 4% per year. The variable cost per rider will be $1.65, and total fixed costs will be $525,000 per year. After six years, the ride will be dismantled at a cost of $245,000 and the parts will be sold for $600,000. The cost of capital is 8.5%, and its marginal tax rate is 25%. a. Calculate the initial outlay, annual after-tax cash flow for each year, and the terminal cash flow.
RealTurf is considering purchasing an automatic sprinkler system for its sod farm by borrowing the entire $30,000 purchase price. The loan would be repaid with four equal annual payments at an interest rate of 12%/year. It is anticipated that the sprinkler system would be used for 9 years and then sold for a salvage value of $2,000. Annual operating and maintenance expenses for the system over the 9-year life are estimated to be $9,000 per year. If the new system is purchased, cost savings of $15,000 per year will be realized over the present manual watering system. RealTurf uses a MARR of 15%/year for economic decision making. Based on a present worth analysis, is the purchase of the new sprinkler system economically attractive?
The Ocean City water park is considering the purchase of a new log flume ride. The cost to purchase the equipment is $8,000,000, and it will cost an additional $475,000 to have it installed. The equipment has an expected life of 6 years, and it will be depreciated using a MACRS 7-year class life. Management expects to run about 150 rides per day, with each ride averaging 35 riders. The season will last for 120 days per year. In the first year, the ticket price per rider is expected to be $5.25, and it will be increased by 4% per year. The variable cost per rider will be $1.65, and total fixed costs will be $525,000 per year. After six years, the ride will be dismantled at a cost of $245,000 and the parts will be sold for $600,000. The cost of capital is 8.5%, and its marginal tax rate is 25%. Using Goal Seek, calculate the minimum ticket price that must be charged in the first year in order to make the project acceptable.
The Logan Well Services Group is considering two sites for storage and recovery of reclaimed water. The mountain site (MS) will use injection wells that cost $4.2 million to develop and $280,000 per year for M&O. This site will be able to accommodate 150 million gallons per year. The valley site (VS) will involve recharge basins that cost $11 million to construct and $400,000 per year to operate and maintain. At this site, 720 million gallons can be injected each year. If the value of the injected water is $3.00 per thousand gallons, which alternative, if either, should be selected according to the B/C ratio method? Use an interest rate of 8% per year and a 20-year study period. The B/C ratio is . Select alternative (Click to select) neither of the alternatives mountain site valley site .
Carson Trucking is considering whether to expand its regional service center in Moab, Utah. The expansion will require the expenditure of $10,000,000 on new service equipment and will generate annual net cash inflows by reducing operating costs by $2,500,000 per year for each of the next eight years. In year 8, the firm will also get back a cash flow equal to the salvage value of the equipment, which is valued at $1 million. Thus, in Year 8 the investment cash inflow will total $3,500,000. Calculate the project NPV using each of the following discount rates: A. 9 percent B. 11 percent C. 13 percent D. 15 percent in excel
A highway is to be built connecting Maud and Bowlegs. Route A follows the old road and costs $4 million initially and $210,000/year thereafter. A new route, B, will cost $6 million initially and $180,000/year thereafter. Route C is an enhanced version of Route B with wider lanes, shoulders, and so on. Route C will cost $9 million at first, plus $260,000 per year to maintain. Benefits to the users, considering time, operation, and safety, are $500,000 per year for A, $850,000 per year for B, and $1,000,000 per year for C. Using a 7% interest rate, a 15-year study period, and a salvage value of 50% of first cost, determine which road should be constructed.
An airline is considering a project of replacement and upgrading of machinery that would improve efficiency. The new machinery costs $500 today and is expected to last for 5 years with no salvage value. Straight line depreciation will be used. Project inflows connected with the new machinery will begin in one year and are expected to be $300 each year for 5 consecutive years and project outflows will also begin in one year and are expected to be $150.00 each year for 5 consecutive years. The corporate tax rate is 30% and the required rate of retum is 7% Calculate the project's net present value. Place your answer in dollars and cents. Do not include a dollar sign or comma in your answer. Work your analysis with at least four decimal places of accuracy YOU ARE NOT FINISHED. NOW GO ON TO THE SECOND PARTI PART 2. Given your estimate of the NPV, should you accept or reject the project? Type the word "accept" if you believe you should go ahead with the project of the word "reject" if you…
Carson Trucking is considering whether to expand its regional service center in Mohab, UT. The expansion requires the expenditure of $10,500,000 on new service equipment and would generate annual net cash inflows from reduced costs of operations equal to $2,000,000 per year for each of the next 9 years. In year 9 the firm will also get back a cash flow equal to the salvage value of the equipment, which is valued at $1.2 million. Thus, in year 9 the investment cash inflow totals $3,200,000. Calculate the project's NPV using a discount rate of 10%. If the discount rate is 10%, then the project's NPV is $____________
An airline is considering a project of replacement and upgrading of machinery that would improve efficiency. The new machinery costs $300 today and is expected to last for 5 years with no salvage value. Straight line depreciation will be used. Project inflows connected with the new machinery will begin in one year and are expected to be $250 each year for 5 consecutive years and project outflows will also begin in one year and are expected to be $ 112.50 each year for 5 consecutive years. The corporate tax rate is 32% and the required rate of return is 9%. Calculate the project's net present value. YOU ARE NOT FINISHED. NOW GO ON TO THE SECOND PART! PART 2. Given your estimate of the NPV, should you accept or reject the project?

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