Tom and Lynda are contemplating the purchase of some cardio machines (e.g., treadmills, elliptical trainers, and stair master). They project that the purchase of gym quality machines would cost $25,000. Operating expenses such as power and maintenance would be $1,200 per year. Tom and Lynda project that the machines would last three years. While current clients would appreciate access to newer equipment, no new members would be added if Tom and Lynda replaced the machine. Each member generates $65 in contribution per month.

Required:
a. Calculate the net present value (NPV) of the purchase at 15%. Assume that the cash outflow takes place now, that all cash inflows take place at the end of the year, and that the machines have zero salvage value at the end of three years. Ignore taxes in your analysis.
b. Suppose Tom and Lynda tell you that not replacing the machines would lead to the loss of 15 members this year, 20 more the next, and 25 the year following. Redo the analysis in part (a).
c. What inference do you draw about the role of the status quo option in NPV analysis?