You have decided you're tired of working for someone else and would like to start up a business venture. You've applied to Shark Tank for investment but were turned down. You think the best fit for you is a fitness center, where you will be a personal trainer, sell nutrition supplements and sell a clothing line. You will need to find a location for your business, hire employees, buy equipment, and consider all of the other overhead items you will need to run your business. Following is the information you have obtained so far:
You would like to run the fitness center for 10 years and then decide to sell or continue the operations. (Note, depreciation will be calculated on the estimated 10-year life)
Instructions
a. Calculate the following
1. NPV
2. simple payback
3. IRR (using excel)
4. ARR
5. profitability index
b. Should you invest in this new business venture?
c. What is the project's breakeven before-tax and after-tax cash flows that will provide an NPV of zero?
d. What are the project's current net before-tax and after-tax operating cash flows?
e. How much can you be off on your cash flow estimates and still have the business survive?
f. What does part e tell you about your estimated before-tax cash flows?

Question

You have decided you're tired of working for someone else and would like to start up a business venture. You've applied to Shark Tank for investment but were turned down. You think the best fit for you is a fitness center, where you will be a personal trainer, sell nutrition supplements and sell a clothing line. You will need to find a location for your business, hire employees, buy equipment, and consider all of the other overhead items you will need to run your business. Following is the information you have obtained so far:
  You would like to run the fitness center for 10 years and then decide to sell or continue the operations. (Note, depreciation will be calculated on the estimated 10-year life)
Instructions
a. Calculate the following
1. NPV
2. simple payback
3. IRR (using excel)
4. ARR
5. profitability index
b. Should you invest in this new business venture?
c. What is the project's breakeven before-tax and after-tax cash flows that will provide an NPV of zero?
d. What are the project's current net before-tax and after-tax operating cash flows?
e. How much can you be off on your cash flow estimates and still have the business survive?
f. What does part e tell you about your estimated before-tax cash flows?

Quizplus · Accepted Answer

The Answer of You have decided you're tired of working for someone else and would like to start up a business venture. You've applied to Shark Tank for investment but were turned down. You think the best fit for you is a fitness center, where you will be a personal trainer, sell nutrition supplements and sell a clothing line. You will need to find a location for your business, hire employees, buy equipment, and consider all of the other overhead items you will need to run your business. Following is the information you have obtained so far:
  You would like to run the fitness center for 10 years and then decide to sell or continue the operations. (Note, depreciation will be calculated on the estimated 10-year life)
Instructions
a. Calculate the following
1. NPV
2. simple payback
3. IRR (using excel)
4. ARR
5. profitability index
b. Should you invest in this new business venture?
c. What is the project's breakeven before-tax and after-tax cash flows that will provide an NPV of zero?
d. What are the project's current net before-tax and after-tax operating cash flows?
e. How much can you be off on your cash flow estimates and still have the business survive?
f. What does part e tell you about your estimated before-tax cash flows?

You Have Decided You're Tired of Working for Someone Else