Reference no: EM13504816
Case study-NPV of opening a small business Jinny Buffett recently retired as a flight intendant and is interested in opening a fitness center and health spa ex¬clusively for women in Grand Cayman, where she resides. After careful study, she is somewhat puzzled as to how to proceed. In her words, "I see my business going in one of two directions: Either I open the fitness center and health spa all at once, or I start with the health spa and hold off on the fitness center for a while. Either way, It should be a success because women on this island love to be pampered. My only Concern about the fitness center is the initial cost, but if the projections look good
Required:
a. Calculate the net present value in US$ of an investment in the health spa only, assuming that the I,000-square-foot unit is purchased and then resold at the end of 10 years. (Hint: Before making your present value calculations, multiply all amounts expressed in Cl$ by $1.25 to convert into US$.)
b. Calculate the net present value in US$ of an investment in the fitness center and health spa, assuming that the 2,500-square-foot unit is purchased and then resold at the end of 10 years.
Jinny is quite concerned about possible forecasting errors and has asked you to prepare a more conservative estimate. Repeat part b, assuming that the fitness center attracts only 300 members per year (rather than 500); that the net cash inflow per month from cosmetics and skin care products is only CI$6,000 per month (rather than Cl$8,000 per month); and that commercial real estate values in Grind Cayman at the end of 10 years are only CI$200 per square foot (rather than CI$300 per square foot).
d. Explain why it might be in Jinny's best interest to lease (rather than purchase) the 1.000-square-foot unit if she initially decides to open the health spa only. Althnugh no calculations are required, you should consider both quantitative and qualitative factors in your response.
e. Vit a. is your overall recommendation? Include an explanation of any additional faciort. that you would consider in making your recommendation. Keep in mind that Jinny has not given herself a salary in her projections. Assume that a rea-sonable salary would be CI$4,000 per month.