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The owners of the Hercules Health Club are contemplating the purchase of some cardio machines with...

The owners of the Hercules Health Club are contemplating the purchase of some cardio machines with an estimated useful life of four years.

The owners expect gym memberships will increase by 10 each year as a result of the new equipment. Each member contributes $75 per month.

Fixed operating expenses would increase $1,200 each year.

The owners’ cost of capital is 15%.

If NPV is used to evaluate the project, what price are the owners willing to pay for the new equipment?

Solutions

Expert Solution

P = Net Savings = ($75*12*10) - $1200 = $9,000 - $1,200 = $7,800

n = 4 years

r = cost of capital = 15%

Present Value of savings = P * [1 - (1+r)^-n] / r

= $7,800 * [1 - (1+15%)^-4] / 15%

= $7,800 * 0.428246754 / 0.15

= $22,268.8312

The price owners willing to pay fof the project is $22,268.83

jeff jeffy answered 2 years ago
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