Bold’s Gym, a health club chain, is considering 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. 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%.
(a) What is the present value profit/loss of the deal?
(b) The club is considering offering a special deal to the members 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?