Fit for Life, a full service fitness center has accumulated $135,000 for capital expenditures during the upcoming year. The accounting manager has received five proposals from various department heads. The following guidelines have been established to evaluate the proposals and determine which will be funded.

1. To be funded, a project must have a payback period of 6 years or less.

2. Projects must have a cash return no less than the company's Required Rate of Return of 6%

3. All projects should be evaluated based on their NPV, Internal Rate of Return, Accounting Rate of Return and Pay Back Method.

4. The project(s) with the highest profitability ratios will be selected for funding.

5. The organization will fund as many projects as possible; however, if the allotment of funds is not depleted, the balance will be carried over to the following year.

Prepare a memo to the manager of Fit for Life, telling her which proposals should be funded. With the memo, turn in supporting evidence (show all NEATLY DONE calculations). The five proposals are as follows:

1. Members have requested that the center begin offering aerobic classes. There is ample space in the current facility, although some renovation and remodeling would be required - hardwood floors, sound systems, etc. The cost of these physical changes is estimated at $60,000. A market survey reveals that the aerobic classes would draw approximately 347 participants, and each would be willing to pay a monthly fee of $35. An annual cost of offering the classes is estimated at $12,900.

2. One instructor has suggested the center open a juice bar/sandwich shop. The bar/shop would be largely self-serve, so minimum-operating costs would be involved, however some equipment would need to be purchased. An area currently used for storage could be converted to the bar/shop. The equipment and renovations would cost $125,000. The assets are estimated to have a 7-year life with a salvage value of $20,000. Thus, annual depreciation will be $15,000. Net cash revenues and expenses to be generated from the project are expected to be:

Year 1	$47,000
Year 2	$32,000
Year 3	$35,000
Year 4	$36,200
Year 5	$38,500
Year 6	$38,000
Year 7	$37,000

3. The head of the maintenance department has suggested the center should investigate purchasing a new heating/air conditioning system. New systems are very efficient, and can save the center a substantial amount each year in reduced utility expenses. The system has a purchase price of $47,000 and is expected to save $5,500 per year in utility costs. The system under consideration has a life of 10 years and a salvage value of zero. (Use straight-line depreciation)

4. The manager of the IT Department has requested a new computer and data base software. She believes this investment will increase the capability of identifying potential new members; determine effective ways to promote the center based on current customer desires, etc. The computers will cost $10,000 and the data base software is priced at $7,000 Revenue and expenses will be increased as follows:

	Increased Fees	Increase operating cost for new members	Cost of operating computers
Year 1	$13,500	$6,750	$1,500
Year 2	$13,500	$6,750	$1,500
Year 3	$7,000	$4,500	$1,500
Year 4	$9,000	$4,500	$1,500
Year 5	$5,400	$2,700	$1,500
Year 6	$5,400	$2,700	$1,500

5. Management has considered purchasing adjoining lots and making a 1/4-mile walk/jog track around the entire property. Purchasing the lots and having the landscaping will cost $30,000. Any maintenance or upkeep can be performed by the current maintenance and landscaping crews, so no additional operating costs are expected. With this added feature of the center, management estimated current member fees can be raised slightly, and will provide an additional $47,000 per year in revenues

Answer rating: 100% (QA)

Memo To Manager of Fit for Life From Subject Capital Expenditures Proposals This memo is to inform y... View the full answer