Congratulations! You were recently appointed as Regional Director for a health and fitness club that operates ten
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Question:
Congratulations! You were recently appointed as Regional Director for a health and fitness club that operates ten facilities in your area. You are thrilled about this appointment! To get to know the needs of each facility, you decide to have a retreat with the managers of each facility. During this retreat, three facility managers propose you invest in capital projects at their respective facilities. Below are the proposals:
- The Woodcrest facility is requesting $10,000 to install hydro-based massage chairs. The manager estimates the new massage chairs will produce revenues of $3,000 per year for 5 years.
- The Terra-Belle facility is requesting $20,000 to renovate the group fitness area. The manager indicates the facility expects to receive an additional $6,300 per year for the next 5 years due to the renovations.
- The Hoover facility is requesting $60,000 to construct and install an indoor swimming pool. The manager estimates new pool will produce the following revenues over the first 5 years, respectively: $15,000, $15,000, $20,000, $20,000, and $10,000.
Cost of capital is 7%.
Task 1
Evaluate each facility request using the capital budgeting techniques below.
- Payback Period (report answer in number of years)
- Discount Payback Period (report answer in number of years)
- Net Present Value (NPV) (report answer in dollars, rounded to two decimals)
- Internal Rate of Return (report answer in percentage, rounded to two decimals)
- Modified Internal Rate of Return (report answer in percentage, rounded to two decimals)
Task 2
Answer the following questions:
- If the projects are independent, which would you select? Why? Be sure to use capital budgeting to explain and support your position.
- If the projects are mutually exclusive, which would you select? Why? Be sure to use capital budgeting to explain and support your position.
- What additional information do you believe is needed beyond the capital budgeting outputs in order to make the most optimal decision?
Related Book For
Operations Management Processes And Supply Chains
ISBN: 9781292409863
13th Global Edition
Authors: Lee Krajewski, Naresh Malhotra, Larry Ritzman
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